Running a business is inherently risky; some more so than others. However, there are many steps you can take to minimise your exposure to risk, not least of which is the legal structure you use for setting up and operating your business. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business. However, this is not the case for a limited company.
Forming a limited company
Company formation to most people means forming a company limited by shares, often known as a “private limited company”. Shares are issued and directors are appointed by the shareholders (often the same people in a small business). The benefit of this type of company over a partnership is that the shareholders have limited liability so, if the company fails, there is no claim on the assets of the shareholders (beyond their original investment). As long as the business is operated legally and within the terms of the Companies Act, directors’ personal assets are not at risk in the event of a winding up or receivership.
Operating as a limited company often gives suppliers and customers a sense of confidence in a business too. Larger organisations in particular will prefer not to deal with non-limited businesses. Banks also appear to favour limited company customers, although they will often seek personal guarantees from the directors.
Forming a private limited company is reasonably straightforward and, following changes to the Companies Act which have further simplified much of the legislation, many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business.
The benefits of a private limited company formation include:
- Suits the majority of commercial trading requirements in the UK
- Can undertake any nature of business
- Can operate anywhere in the world
- Members (i.e. shareholders) have limited liability
- Can have a sole director and sole shareholder
- Enhanced credibility with customers and suppliers
- Changes to legislation over the last few years have meant much lower costs associated with limited companies
- As there is no obligation for a limited company to commence trading within any set time period after its incorporation, the formation of a limited company is also a simple and low cost way to protect a business name for future use.
Company Limited By Guarantee
A company limited by guarantee is the legal structure normally used to establish a club or an association. It also has limited liability; the liability of its members being limited to the amount each member undertakes to contribute to the assets of the company in the event of its being wound up, normally £1.
No shares are issued and the company has members who agree to contribute a membership fee or subscription. Normally they have equal voting rights and elect a board of directors. Any profits (often known as “surpluses”) are not distributed as dividends, but may be used to support the activities for which the club is formed.
Public Limited Company (PLC)
You must form a public limited company if you want to trade shares with the public. A PLC must have a minimum authorised and issued capital of £50,000. At least 25% (£12,500) of this minimum must be fully paid up before the Registrar of Companies can issue a Certificate for Commencement of Trading. As a private company can be converted to a PLC most PLCs start life as normal private companies and convert at a later date prior to flotation of the stock market. However, just because a company is a PLC does not automatically mean its shares a publicly listed.
For advice about the best way to structure your business, speak to one of the Truelegal team.