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Advantages of forming a limited company

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Advantages of limited liability for a company

Whilst many businesses prefer to trade as a sole trader or a partnership, nearly all significant businesses operate as an incorporated company. The main advantages of incorporation via a limited company are summarised below:

Separate Legal Identity

A limited company has a legal existence separate from management and its members (the shareholders)

Members' liability is limited ("limited liability")

The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companies issue shares as "fully paid", if things go wrong, a members' only loss is the value of the shares and any loans made to the company. Personal assets are not put at risk. The protection of limited liability does not, however, apply to fraud. Company directors have a legal duty not to incur liabilities in their companies which they have reason to believe the company may not be able to pay. If creditors lose money through director fraud, the directors' personal liability is without limit.

Protection of Company Name

The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it. The only protection for sole traders and partnerships is trademark legislation.

Continuity

Once formed, a company has everlasting life. Directors, management and employees act as agent of the company. If they leave, retire, die - the company remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.

New Shareholders and Investors can be easily introduced

The issue, transfer or sale of shares is a relatively straightforward process - although existing shareholders are protected via their "preemption" rights and by company legislation that seeks to protect the interests of minority investors.

The process of lending to a company is also easier than with other business forms. The lending bank may be able to secure its loan against certain assets of the business (a "floating charge") or against the business as a whole ("fixed charge".

Better Pension Schemes

Approved company pension schemes usually provide better benefits than those paid under contracts to self-employed sole trading businesses.

Taxation

Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax-deductible costs that can be offset against a company's profits. In addition, the current level of Corporation Tax is lower than income tax rates.



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Starting a Business

Sources of Finance for a Startup
Franchising
Cash Flow Forecasting for a Startup
Creating & Protecting Business Ideas
Startups and Understanding the Market
Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
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Finance

Revenues
Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
Improving Cash Flow
Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios
Gearing

Marketing

Competition
Products & Brands
Place (Distribution)
Promotion
Pricing
Price Elasticity of Demand

Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
Franchising
Sole Traders and Partnerships
Limited Companies
Generating and Protecting a Business Idea
Organisational Structures

People

Working in Teams
Communication Basics
Communication Methods
Workforce Planning
Recruitment, Selection & Training
Employee Motivation
Organisational Structures

Operations

Operational Objectives
Critical Path Analysis
Scale and Resource Mix
Lean Production
Capacity Management
Customer Service Basics
Managing Quality
Operational Decision-making
Using Technology in Operations
Working with Suppliers

Economic Environment

Economic Sectors
Government Spending & Taxation
Inflation
Unemployment
Interest Rates & Monetary Policy

Business Strategy

Leadership styles
Business Culture
Change Management







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INTRODUCTION TO ACCOUNTS
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Users of Accounts
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