Last editedNov 20212 min read
In the UK, you can choose to set up a business as a sole trader, a partnership or a limited company. Limited companies come in two forms: public and private. Each form has its own advantages and disadvantages. It’s therefore very important to think carefully before choosing one of them.
The basics of incorporation
Businesses come in two basic forms. These are unincorporated businesses and incorporated businesses. Sole traders, general partnerships and limited partnerships are all examples of unincorporated businesses.
Unincorporated businesses only exist as an extension of their owners. This means that any income they generate is treated as their owners’ personal income. Similarly, if they incur any expenses, their owner is personally liable for them.
Limited liability partnerships, private limited companies and public limited companies are all examples of incorporated businesses. Incorporated businesses are legal entities in their own right. This means that any income they earn belongs to them. They may or may not choose to share it with their owners. Likewise, any expenses they incur are their responsibility.
The pros and cons of being unincorporated
Unincorporated businesses are easy to set up and easy to dissolve. Sole traders just need to register/unregister with HMRC. General partnerships and limited partnerships do require some more administration to set up. Even so, the administration involved is much less than with limited liability partnerships and limited companies.
Managing the company’s finances is also very simple. The company’s owner reports its gross income and any allowable deductions. The net result is considered income from employment for the company’s owner and taxed accordingly.
The price of this simplicity, however, is a lack of room for growth. Because unincorporated businesses are indistinguishable from the individuals who own them, they can never be directly sold on. This means that they can only take on as much business as their owners can personally manage. They can never grow beyond that.
The pros and cons of being incorporated
Incorporated businesses are legal entities in their own right. There are two main advantages to this. Firstly, it allows for more flexibility in ownership. This means that there is more room for growth and that the business can continue to operate even when individual owners depart. For example, if an owner wishes to retire, the business could be sold or simply passed on.
Secondly, it allows for more flexibility in managing the company’s finances. Company employees must be paid reasonable salaries for their work (even if they are also company owners). Profits, however, can be disbursed either as employment bonuses or as dividends. Alternatively, they can be held within the company (for example to be reinvested).
On the flip side, any expenses incurred by the company are, usually, the responsibility of the company, not its owners. There are, however, some possible exceptions to this rule. The two main ones are if someone acts as a personal guarantor and in cases of active malpractice.
The main downside to incorporation is the expense and administration it involves. This expense and administration can, however, be limited by using a private limited company instead of a public limited company.
Public and private limited companies
A public limited company (or PLC) is one available for public ownership. In other words, it’s a company that is, or can be, listed on the stock market. PLCs are legally required to disclose information shareholders need to know to make informed decisions. Even without the law, they would need to disclose this information in order to attract shareholders.
A private limited company (or Ltd) is an incorporated company that is held in private ownership. Private limited companies can be sold but the sale must take place outside of a stock market. A private limited company is still required to file documents relating to its activities. The disclosure requirements are, however, much less onerous than for PLCs.
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If you’re interested in finding out more about private companies and their advantages and disadvantages, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.