7 Reasons to Choose a Limited Company over an Unlimited One
If you are starting a new business, one of the most important decisions you have to make is what type of legal structure to adopt. There are many options available, but the most common ones are limited and unlimited companies. What are the differences between them and which one is better for your business? Here are seven reasons why you might want to choose a limited company over an unlimited one.
1. Limited liability: This is the main advantage of a limited company. It means that the owners (shareholders) of the company are not personally liable for the debts or obligations of the business. If the company goes bankrupt or faces legal claims, the shareholders only risk losing the money they invested in the company, not their personal assets. On the other hand, an unlimited company does not offer this protection. The owners (partners) of an unlimited company are jointly and severally liable for all the debts and liabilities of the business. This means that they can be sued personally and have their assets seized by creditors or claimants.
2. Tax benefits: Another benefit of a limited company is that it can enjoy some tax advantages over an unlimited company. For example, a limited company pays corporation tax on its profits, which is usually lower than the income tax rate that applies to individuals. A limited company can also claim various deductions and allowances that reduce its taxable income. Additionally, a limited company can pay dividends to its shareholders, which are taxed at a lower rate than salary or interest income. An unlimited company, on the other hand, is taxed as a partnership. This means that the profits of the business are distributed among the partners and taxed as their personal income. The partners cannot claim any deductions or allowances for their share of the business expenses and they have to pay income tax and national insurance contributions on their earnings.
3. Professional image: A third reason to choose a limited company over an unlimited one is that it can enhance your professional image and credibility. A limited company has to register with Companies House and follow certain rules and regulations regarding its name, accounts, records, and filings. This makes it more transparent and accountable to the public and potential customers. A limited company also has to display its name and registration number on its website, stationery, invoices, and other documents. This shows that it is a legitimate and established business that complies with the law. An unlimited company, on the other hand, does not have to register with Companies House or follow any specific rules or regulations regarding its name or operations. This makes it less visible and recognizable to the public and potential customers.
4. Access to finance: A fourth reason to choose a limited company over an unlimited one is that it can access more sources of finance than an unlimited company. A limited company can raise capital by issuing shares to investors or by borrowing money from banks or other lenders. A limited company can also benefit from various government schemes and grants that support small businesses and innovation. An unlimited company, on the other hand, has fewer options to raise capital. It cannot issue shares to investors or benefit from some government schemes and grants. It can only borrow money from banks or other lenders, but this may be more difficult or expensive than for a limited company.
5. Continuity: A fifth reason to choose a limited company over an unlimited one is that it can ensure continuity of the business in case of death or departure of one of the owners. A limited company has a separate legal existence from its owners. This means that it can continue to operate even if one of the shareholders dies or leaves the business. The shares of the deceased or departing shareholder can be transferred to another person or entity without affecting the status or operation of the company. An unlimited company, on the other hand, does not have a separate legal existence from its owners. This means that it ceases to exist if one of the partners dies or leaves the business. The remaining partners have to dissolve the partnership and form a new one with different terms and conditions.
6. Flexibility: A sixth reason to choose a limited company over an unlimited one is that it can offer more flexibility in terms of management and ownership of the business. A limited company can have different types of shares with different rights and privileges attached to them. For example, some shares may have voting rights while others may not; some shares may have preferential rights to dividends while others may not; some shares may be redeemable while others may not; etc. This allows the shareholders to tailor their involvement and interest in the business according to their preferences and needs. A limited company can also change its share capital, structure, name, or objectives more easily than an unlimited company. An unlimited company, on the other hand, has less flexibility in terms of management and ownership of the business. An unlimited company can only have one type of share with equal rights and privileges for all partners. This means that all partners have to agree on all decisions and actions affecting the business. An unlimited company also has more difficulty in changing its name, structure, or objectives than a limited company.
7. Privacy: A seventh reason to choose a limited company over an unlimited one is that it can offer more privacy and confidentiality to the owners of the business. A limited company does not have to disclose the names or personal details of its shareholders to the public or to third parties. The only information that a limited company has to make public is its annual accounts, which can be prepared in a way that does not reveal too much information about the business. An unlimited company, on the other hand, has to disclose the names and personal details of its partners to the public and to third parties. The partners also have to file their personal tax returns, which may contain sensitive information about their income and assets.
These are some of the reasons why you might want to choose a limited company over an unlimited one for your business. However, there are also some disadvantages and challenges associated with a limited company that you should be aware of before making your decision. For example, a limited company has more costs and responsibilities than an unlimited company, such as registration fees, annual filing fees, accounting fees, audit fees, etc. A limited company also has more legal and regulatory obligations than an unlimited company, such as complying with the Companies Act, keeping proper records and registers, holding annual general meetings, etc. A limited company also has less control over its profits than an unlimited company, as it has to pay corporation tax and dividends tax on its earnings.
Therefore, you should weigh the pros and cons of both types of companies carefully and consult a professional adviser before deciding which one is best for your business.
Difference Between Limited and Unlimited Company
One of the most important decisions when starting a business is choosing the type of legal structure for your company. There are different types of companies in England and Wales, such as sole traders, partnerships, limited liability partnerships, and companies. Within companies, there are two main categories: limited and unlimited companies. The main difference between them is the extent of liability of the owners or shareholders for the debts and obligations of the company.
Limited Liability Companies
A limited company is a company that has a limit on the liability of its owners or shareholders, which is the amount they paid for their shares or the amount of the guarantee. This means that if the company goes bankrupt or cannot pay its debts, the owners or shareholders will only lose their investment in the company, but their personal assets will not be affected. This is why limited liability companies are considered a type of “incorporated business structure”, because they have their own legal personality, separate from their owners.
There are two types of limited companies: companies limited by shares and companies limited by guarantee. Companies limited by shares are the most common type of limited company, and they are usually used for profit-making businesses. The owners or shareholders of these companies have shares that represent their ownership and rights in the company. The value of their shares depends on the performance and profitability of the company.
Companies limited by guarantee are less common, and they are usually used for not-for-profit organisations, such as charities, clubs, or associations. The owners or members of these companies do not have shares, but they have a guarantee that they will contribute a certain amount of money to the company if it is wound up. The amount of the guarantee is usually nominal, such as £1 or £10.
The advantages of limited liability companies are that they offer protection to the owners or shareholders from personal liability, they have access to more sources of finance, such as loans or equity, and they have more credibility and reputation in the market. The disadvantages are that they have more legal and administrative requirements, such as filing accounts and annual returns with Companies House, they have less privacy and transparency, as their information is available to the public, and they may have to pay more taxes than other types of business structures.
Unlimited Liability Companies
An unlimited company is a company that has no limit on the liability of its owners or shareholders, which means that they are fully responsible for the debts and obligations of the company. This means that if the company goes bankrupt or cannot pay its debts, the creditors can claim not only the assets of the company, but also the personal assets of the owners or shareholders. This is why unlimited liability companies are considered a type of “unincorporated business structure”, because they do not have their own legal personality, but they are an extension of their owners.
Unlimited liability companies are very rare in England and Wales, and they are usually used for small or family businesses that do not need external financing or public exposure. The owners or shareholders of these companies do not have shares or guarantees, but they have an equal interest and control in the company.
The advantages of unlimited liability companies are that they have less legal and administrative requirements, such as filing accounts and annual returns with Companies House, they have more privacy and flexibility, as their information is not available to the public, and they may have to pay less taxes than other types of business structures. The disadvantages are that they expose the owners or shareholders to unlimited personal liability, they have limited access to finance, as lenders or investors may be reluctant to lend or invest in them, and they have less credibility and reputation in the market.
Global Demand for Limited and Unlimited Companies
The global demand for different types of business structures depends on various factors, such as economic conditions, legal regulations, tax policies, cultural preferences, and industry trends. According to some studies , there has been an increase in the demand for limited liability companies in recent years, especially in emerging markets and developing countries. This is because limited liability companies offer more advantages than disadvantages for entrepreneurs who want to start or expand their businesses in a competitive and uncertain environment.
On the other hand, there has been a decrease in the demand for unlimited liability companies in recent years , especially in developed countries and mature markets. This is because unlimited liability companies offer more disadvantages than advantages for entrepreneurs who want to protect their personal assets and reduce their risks in a stable and regulated environment.
Therefore, it can be concluded that there is a difference between limited and unlimited companies in terms of their liability, ownership, advantages, disadvantages, and global demand. Depending on the needs and goals of the entrepreneurs, they can choose the type of company that suits them best.
References:
http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
https://legalvision.co.uk/corporations/limited-vs-unlimited-company/
https://www.businessinsider.in/difference-between-limited-and-unlimited-company/articleshow/71338690.cms
https://www.gov.uk/limited-company-formation
https://www.investopedia.com/terms/c/corporationtax.asp
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