What are the benefits of a Limited Company and why you should know it. A business organization exists in different forms. And knowing the right business path to venture in is very important and we will be discussing on how establishing a limited company is beneficial over a sole trading company. So let’s take a look into what a limited company and a sole trading company is.
A limited company or limited liability company is a legal business organization that is responsible for most of the decision making and transaction it does. There’s a separation of the company’s financier and the owner in turn, provides a sufficient protection for both the owners and shareholders who a mot on any way liable for the debts of the company.
Limited company belongs to two categories namely private limited companies and public limited company. Let’s take a dive into the definition of a private limited company and a public limited company.
Private limited company is a legal entity which is privately held by the owners. It restricts it’s transfers of shares and can also control the number of members to a maximum amount of 200 people other than a one person organization or company.
A private limited company also prevent the entity to invite the public from subscribing the securities and some other benefits offered by the company. Such as shares and debentures. Their personal assets and wealth are protected by limited liability in cases when the company goes bankrupt.
The only thing the shareholder will loose is their investments into the company situation even debt arises. So now let’s talk about the advantages of running a private limited company.
One of the advantages of the advantages of private limited company is that selling of shares can provide additional source of finance for the company and also can get loans from Bank is another source of finance, for example, debt and equity finance are available so that losses can be covered.
A private limited company can also have control over the number of people who can be shareholders and the owners as well can also control who the shareholders are. With this, there’s less conflict between the shareholders and managers.
Lastly a private limited company enjoys some level of privacy, because, it does not publicize its annual account to the general public but all the activities are known to the shareholders and owners. Though, the private limited company has a handful of advantages but it also has its own shortcomings.
A private limited company has a poor source of finance because they don’t have access to stock exchange but the only source of finance is trading or goods and selling of shares. All the profit made by a private limited company is shared among the shareholders which is called a diluted profit.
Also the companies are required to publicize their account, this isn’t safe because it causes a lack of privacy and it’s an eye opener for competitors to strategize their plan. A final disadvantage of private limited company is that important decisions are taken by the government officials rather than the elected representatives to administer procedures to establish a proper company
Public limited company: It is a company that allows the public to subscribe to its share i.e they share ownership in its business. It trades publicly on stock exchange and it must have a minimum of seven person but no maximum number. A public limited company must report their earnings quarterly.
A public limited company around the world ends with the abbreviation “PLC”. In a public limited company the shareholders are not in any way responsible for anything that is done in the name of the company. The share holders have the advantage of enjoying limited liability and also it enjoys the advantage of having large number of people who purchase shares to become owners of the company.
In a public limited company the death, resignation and withdrawal of some shareholders will not affect the existence of the company in any way therefore it enjoys infinite existence and just like the private limited company, the private properties of the shareholders will not be affected when the company is experiencing liquidation or debt.
A public limited company has its ownership separated from management. The shareholders in this case are regarded as the owner of the company and one the other hand the management is the sit of board of directors. Also, in a public limited company there’s an authority from the law to carry on transactions or business.
The company must follow some special formalities before registration, this is done by securing incorporation which the company has to file articles or association and memorandum of association with registration of companies. Lastly, for legal purpose it is required to keep to keep prescribed books of account like mentioned earlier this book of account must be audited and published quarterly or annually.
Now that we have an insight into what a public limited company it is sure to have its advantages and disadvantages. All these will be discussed so let’s take a quick look at the advantage of running a public limited company.
There are so many advantages of public limited company and we will be discussing a few. A public limited company enjoys the legal existence and have more personality from the owners, there’s also a continuity of the company even after the death withdrawal or death of the shareholder.
The owners are separated from the management because the share holders are regarded as the owners of the company . The management is in the hands of the board of directors there’s democracy in management of choosing board of directors, shareholders can franchise the general meeting.
In recruitment of expertise for joint stock company which will attract men of ability to work for it. There is sufficient capital for expansion which leads to economies of large scale production. Also transferring Of shares in a public limited company can be easily done without having an effect on the business operation.
The disadvantage of public limited company is that there’s a lack of privacy because of the compulsory law to publish their annual audited accounts to the public because of the privacy of the company is invaded. Everybody in the company has different ways of thinking and have ideas which brings about conflict of interest and it affects the way the business improves. The business is hard to establish because of the procedures and formalities involved in registering the business is complicated.
The amount of tax paid is large which comes from the profit been made in the company, the tax burden is heavy. The company cannot venture into any type of business apart from it object clause in the memorandum of association.
Decision making in public limited company is quite slow because of the large consultation and discussion before conclusion is made. Separating the owner from control might not make the helm of put enough work into it.
As you can see a limited company has its liability in the company to be limited to the amount of share capital the shareholders agreed to contribute when liquidation occurs and also in limited by guarantees and company limited by shares. Now that we know all that needs to be known about limited company or limited liability company, let’s see what sole trading is.
Sole trading is a form of business that is owned, managed and funded by just one person with the aim of increasing profits. You might have heard the word one-man business this is the most common and oldest type of business. It isn’t an incorporated business unit because it is owned by just one person who runs the business, undertakes risks, funds the business and profits form the business alone.
Sole trading ranges from primary industries like farming, dairy ,fishing etc Secondary industries which includes printing, small scale manufacturing and also tertiary industries like tailors, hairdressers, traders etc. Unlike Limited companies sole trading has unlimited liability and also it is not a legal entity because the owner is not separated from the business since he/she owns the business so the sole trader manages and controls the business.
A sole trader will obtain capital from sources like: personal savings, loans from friends, loan from banks, loans and grants from government. Sole trading involves small capital to start up and is easy to establish due to small capital required in setting up.
Decision making in sole trading is easy because it is the owner of the company that takes decision without the consent of the workers in the organization. All profits in sole trading belongs to the owner of business. In sole trading a sole trader can keep business matters secrets. He doesn’t need to publicize his account or submit audited balance sheet.
Benefits of Limited company over Sole Trading
1. A limited company means you have the advantage of limited liability. This limited liability means you are not responsible for any form of financial loss caused in the company. A limited company is protected when the company fails. When there is liquidation, the shareholders can only loose the profit attached to the share and not the shares itself.
The shareholder do not suffer the company debt. A sole trader do have liability because there is no protection for fund their business. If the business fails the owners are responsible for all the debt in the business.
2. Tax : Tax has a lot of benefit for people running a limited company because they pay less on tax than a sole trader.
A sole trader National Insurance Contribution (NICO) will be reduced which is compulsory because if you’re a sole trader your profit is subjected to NICO. The benefit of tax to a company is not the rate at which salary and dividend are paid, for people to own a company it is possible to control the finance gotten from the business and control the tax.
3. The name of your company is protected by the law once you register with company house. Nobody is permitted to use the name under any circumstances or any name Close to that choosing a name for a limited company involves formalities. If the name of the company has been used, the certificate of the limited partnership will be rejected.
A sole trader can operate under the owner‘s name. It is permitted for somebody else to trade under the same name you use for your business. This could destroy your business and it makes the Owner go through the stress of name changing there is no legal action against anyone who use your name without permission but for limited company the company will be sued.
4. Professional image in some business and industries is needed in most limited companies. Most lathe companies would like to work with limited companies compared to working with sole traders. A sole trader do not really need to portray a professional image. There is a lot of risk involved in sole trading so it makes it difficult for large companies to invest in the company.
5. A lot of people would operate on sole trading compared to a limited company because of the capital and running costs are well know to be very low. Forming a limited company with partnering makes the cost of the company very small. It is known in the administration that accountant would handle the finance involved with limited company but the task has been made easy through online service which will cut some cost for the company.
Most limited companies uses technology for working because they can afford it. A sole trader might not have the capability to afford technology so most work are done manually.
The advantages of running a sole trading company can not be discarded but a limited company is way better in cutting cost and it gives the opportunity to venture into the stock exchange market. Rethink your choices when it comes to choosing between a Limited company or a sole trading company
