Advantages and disadvantages of running a business as a company limited by shares in the

United Kingdom.

A limited company is among the most common legal forms in the UK for all sorts and

sizes of businesses. In 2012-13, there were over 2.8 million businesses registered in the United

Kingdom, with just 4,800 being unlimited firms1. This is thanks to the numerous professional

and financial advantages it provides, particularly for single traders or contractors, as well as the

fact that it is a common partnership form in many small and medium-sized enterprises.

Companies limited by shares have a structure that is quite similar to corporations,

consisting of an administration and a general meeting. The most notable feature of this sort of

corporation is that the partners are not personally accountable for any debts that the firm may

incur2. As a result, in the case of a problem with the company's functioning and the appearance

of potential debts, the partners' personal assets should not be jeopardised.

In general, the aforementioned function provides various benefits. The most obvious

benefit is that applicants have much less obligation, which is limited to the business's funds and

assets. For many people, this is the deciding factor.

The limited corporation, on the other hand, will function under strict guidelines. In the

UK, for example, if the business borrows money from a bank, the bank will automatically

demand the firm's directors to offer personal guarantees. The bank may additionally seek

collateral on the company's assets and/or the directors' personal assets.

A landlord may also require that, if a small corporation leases premises, the directors

provide personal guarantees for the payment of rent or other lease requirements. Personal

1
Lee Roach, Concentrate Company Law (first published 2011, Oxford University Press 2013) 12
2
Insolvency Act 1986, s 74(2)(d)
guarantees may also be required by some commercial suppliers. This is more common among

the industry's top providers.

In the United Kingdom, and in the great majority of situations, there is no personal

accountability for the directors or shareholders of a bankrupt firm. People in other company

forms may feel ethically or creditor pushed to pay their corporate obligations with personal cash,

but this is not a duty in limited partnerships until specific circumstances happen.

Furthermore, the social capital required in this sort of firm is quite modest, and its

management is relatively straightforward. Registered corporations pay a different tax structure

(corporate tax) than single proprietors or partnerships3. The structure chosen can make a

significant difference in the amount of tax paid on the same firm income.

The establishment of a limited partnership and the ongoing registration requirements do

not apply to lone traders or partners. Even without the contribution of social capital, the cost of

forming a limited corporation is usually relatively low. Similarly, a self-employed individual can

calculate their own wage and deduct it as an expense4.

Another significant advantage is that there is no minimum number of partners, allowing a

single person to establish a corporation. A sole trader/company structure is relatively adaptable

as long as the ownership and control patterns are basic, i.e., a small number of persons who own

and contribute directly to the firm 5.

It is also common that if the firm is reorganised as a limited company, it will be simpler

to attract further investment, owing to the benefit of limited liability6. Because suitable volumes

3
Nathan L. Townsend. Limited Companies. (2014) 2
4
Companies Act 2006, ss 3 (2)
5
McCann Fitzgerald. The Company Limited by Shares (first published 2013 LTD) 1
6
McCann Fitzgerald. The Company Limited by Shares (first published 2013 LTD) 2
and types of shares may be issued, the company's structure is perfect for offering external

investments in the firm. Investing in a partnership is legally dangerous since anybody who shares

in the partnership's earnings is deemed a partner and may face limitless responsibility for all

debts.

Registered corporations pay a different tax structure (or corporation tax) than single

proprietors or partnerships7. The structure chosen can make a significant difference in the amount

of tax paid on the same firm income.

Similarly, organisations of this sort have a better chance of obtaining a bank loan. If the

company wishes to take funds and the bank wants a claim on all assets, the company must be

registered. As a result, the bank may have a second rationale for requiring the firm to be

incorporated as a limited liability company. Banks frequently demand small business directors to

offer personal guarantees on any loans made to their companies.

If the firm fails, the bank is better protected if it is a limited company since only the bank

will have a personal guarantee and hence access to the owner's personal assets if the business is a

limited company. If the company is a sole proprietorship or partnership, all creditors have access

to the owner's personal assets 8.

Because only registered firms may establish floating charges, the floating charge is an

important consideration when selecting a company model. This form of mortgage cannot be

granted by an individual trader or corporation with identical assets.

If a limited company becomes insolvent, the individuals who manage it may be

personally responsible for some or all of its debts if they incurred debts, knew the company
7
Glazers Chartered Accountants. ‘Setting up a UK Company’ (GCA, May 2015) 16
<https://www.glazers.co.uk/docs/setting-up-a-uk-company.pdf> accessed Octuber, 2022.
8
Townsend. (2014) 2
couldn't pay (fraudulent trading), or, once they knew or should have known that the company

would become insolvent, they did not take steps to minimise the loss to creditors, such as

liquidating the company or at least ceasing operations 9. Directors may face additional penalties,

including a fine or possibly jail for fraudulent trading or disqualification from functioning as a

director, in addition to being accountable for the company's obligations.

Similarly, it should be acknowledged that many problems may occur in such a

community. As a result, it may be a source of various drawbacks. For starters, this form of

organisation has a complicated share transfer. Shares, on the other hand, do not consist of a

media that is easily transmitted. Each part of your sale is maintained under control by the

company's policies as well as UK legislation10. As a result, it is not an appropriate strategy for

attracting a larger number of investors.

The formation of a Limited Company might take a lengthy time. It normally takes about

40 days on average. If more financial resources are required, the bank will be in charge of

seeking personal guarantees11. As a result, limited liability may be jeopardised.

Limited partnerships must also be formed with Companies House and pay an

incorporation fee to Companies House. As a result, as previously stated, personal and business

information will be exposed in the public record. Company records must be kept and made

available to the public at the registered office12. Partners must notify Companies House

immediately if any modifications are made to the business data.

9
Townsend. (2014) 5
10
Insolvency Act 1986, s 74(2)(d)
11
Townsend (2014) 6
12
Chapter 2. 58 (1) of the Companies Act 2006
 Because accounting standards are more complicated and time demanding, you may need

to hire an accountant to help you with your tax concerns. Each year, a Confirmation Declaration

and annual accounts must be lodged with the Companies Register, as well as a business tax

return and annual accounts must be submitted to HMRC13.

To summarise, there are certain disadvantages to forming limited businesses, as one

would anticipate from something that offers so many advantages. Most of these perceived

downsides, however, fade in contrast to the tax benefits, improved professional image, and

limited liability coverage.

Word Count: 1156.

13
I-paye Accountancy. ‘Guide to setting up and running your own limited company’ (I-pave, June 2013). < http://i-
paye.com/wp-content/uploads/2018/03/Guide-to-Setting-up-a-Limited-Company.pdf > accessed Octuber, 2022.