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ADVANTAGES AND DISADVANTAGES OF INCORPORATION
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| Advantages | Disadvantages | ||
| Limited liability: but note personal guarantees.
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The liability of the shareholders on the winding up of a company is limited to the nominal value of the shares they own (for example, if a shareholder owns 10 shares of £1 each, the extent of his liability is £10). | It is worth being aware that directors are sometimes asked for personal guarantees when entering into financing arrangements.
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| Credibility:
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Businesses sometimes prefer to deal with limited companies from a credibility viewpoint.
It may, for example, be easier to obtain finance as a limited company for capital purchases, or to obtain additional borrowing facilities and new finance.
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| Exit routes
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It is easier to sell shares in a company than it is to sell a partnership share – a key consideration when planning a strategy of how to exit from the business.
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Potential purchasers of the company may look to acquire the trade and assets rather than shares in the company which could increase the taxes on sale. However there may be ways to accommodate this. | |
| Costs and formalities of a company
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There is no requirement for limited companies’ accounts to be audited where companies qualifies as small, turnover is below £10.2M and gross assets are less than £5.1M, subject to special cases. In other words a costly and often valueless formality has been lifted from the shoulders of many small companies. | Companies Act requirements do mean, however, that the cost for accountants of producing limited company accounts is slightly more than sole traders and partnerships and there are filing obligations.
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| Taxation
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The rates of corporation tax for profits left in the company are, at present, very low. | There is a tax cost to withdrawing monies from the company. | |
| Employment
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The overall package for the business owner can in many circumstances be more tax efficient than being taxed on profits. | The legislation is quite complicated for employees and constantly changing. We would therefore recommend regular reviews.
The minimum wage, stakeholder pensions and contracts of employment would need to be considered. |
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| Pensions
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Pension provision can be more beneficial and flexible with a company. Directors’ pension contributions get tax relief through the various pension vehicles available – personal pensions, company schemes or self- administered schemes for the directors only to name a few. | ||
