Forming a Limited Company ? The principal benefit of trading via a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. The debts and contracts of the registered company are those of the company and not those of the members, whereas in the case of a partnership every partner is jointly and severally liable with the other partners for all the firm's debts and obligations incurred while he is a partner.

The main advantages of a limited company are :

• The company has a legal existence separate from management and its members (the shareholders)
• Members' liability is limited
• The company's name is protected
• It has flexible borrowing powers
• The company continues despite the death, resignation or bankruptcy of management and members
• The interests and obligations of management are defined
• Appointment, retirement or removal of directors is straightforward
• New shareholders and investors can be easily assimilated
• Employees can acquire shares
• Approved company pension schemes usually provide better benefits than those paid under contracts with the self-employed and those in non-pensionable employment
• The level of premium that directors can pay is restricted but there is no limit on the overall contributions paid by the company for the directors, although there is a maximum benefit limit imposed by the Inland Revenue Superannuation Fund Office
• Taxation - sole traders, partners and partnerships pay income tax.  Sole traders' and partners' income is taxed as the proprietors' income, regardless of how much profit is retained as working capital, and interest on loans to the business is taxed as their income
• Partners are liable personally and jointly for partnership tax and if a partner dies, the surviving partners are responsible for partnership tax
• Directors pay income tax and the company pays corporation tax on company profits, and with current rates of tax company profits earned and retained in the business are assessed to corporation tax at lower rates than if income tax were payable on equivalent profits earned by an unincorporated business

The principal benefit of trading via a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. The debts and contracts of the registered company are those of the company and not those of the members, whereas in the case of a partnership every partner is jointly and severally liable with the other partners for all the firm's debts and obligations incurred while he is a partner.

As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership. As often happens such events are not always under our own control.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses.

Many of the costs associated with managing and operating a limited company are no longer much more than with a non-limited business. Accountants and other professional advisers often have conflicting views when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.

There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts.  The Officers of the Company have no personal liabilities, and are not made bankrupt, and are free to incorporate another company.  However, the shareholders are liable only to the extent of any unpaid shares held.

By contrast, if you trade as a partnership or as an individual, the creditors can claim on all your property to satisfy the debts, and if this is insufficient you may be declared bankrupt.  An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.

Advantages of Limited Liability Company

A registered company exists until it is wound up. It is not affected by death, bankruptcy, mental disorder or retirement of any of its members.

The property of a registered company belongs to and is vested in the company. It is not affected by change of ownership of shares in the company. In a partnership the property belongs to the partners and is vested in them. This means that there are changes of ownership of, and in the formal title to, the firm's property from time to time on the death or retirement of a partner or trustee. In a company, transfer of shares does not affect the title to the company assets.

Subject to any restrictions in the articles, shares in the company may be transferred easily or mortgaged without the consent of the other shareholders.

Limited liability for the shareholders. Liability in the case of a company limited by shares is limited to the amount unpaid on the shares held.

Management of the company can be separate from ownership and therefore provides continuity after share holder changes.

The taxation of companies is often more 'flexible' than other types of organisations. A Limited Company is liable only for tax on its profits, and this is payable by the Company and not personally by the directors or shareholders. The profits of a company are not therefore subject to personal taxation higher rates. Directors pay tax on their personal income. The Company is taxed on profits after all expenses including directors remuneration have been deducted.

To enable you to conduct business in the UK and/or in order that a given business activity may fall under English law.

Capital, to fund the company, may be obtained with relative ease when compared to other business types. Floating charges for example can be created over company assets but not partnership assets and borrowing may be by way of debentures.

Companies enable tax planning, for directors holding shares, in the following areas:

• Offshore tax planning
• Pensions
• Retirement
• Inheritance Provision
• Government grants and business expansion schemes
• Personal loans
• UK tax shelters
• Investment planning

Maximising the Tax Benefits of a Limited Company

One of the main focus for small businesses will be the maximising benefits to minimise the Deemed Schedule E payment.

This can be done by:

• Ensuring that your company makes pension contributions.
• Ensuring that you claim the maximum possible expenses allowable under legislation.
• Ensuring that capital equipment used in your business is purchased by you and that capital allowances are claimed.
• Ensuring that benefits in kind (insurance, health care etc.) are paid out of the company, but only if your Salary and Deemed Payment are likely to be below £26,000, per year.

Other considerations are :

• Keep cash in the business as a loan to the business, so that the company receives interest Gross and pays only 10% tax on the first £10,000 taxable profits. If you keep spare cash in an account in your name you may well pay 40% tax on the interest.
• Ensuring that other income streams are generated by the company and that expenses are allocated to that income, (ie. Partners Salary allocated to the interest income) That way no tax is paid on some income.
• Make investments through the company. But make sure you use up your own £7500 Capital Gains Tax Free Allowance as well as that of your spouse, first before making investments from the company.
• There are a number of other tax advantages for a limited company.  Firstly, there is no National Insurance to pay.  A limited company only pays Corporation Tax at 10% on its profits up to the level of £10,000 and 20% between £50,000 - £300,000, after deducting all expenses including directors remuneration.
• Often it is possible to reduce the Corporation Tax, with careful planning, by making dividend payments to its shareholders, and by the use of a Company Pension Scheme.