Business development · 13 February 2017

Why it makes sense to adopt a limited company structure

Limited company structure
A limited company structure gives you a better platform from which to step back or exit the business

I believe that you should begin with the end in mind (one of Stephen Covey’s seven habits of highly effective people) and the end goal for many entrepreneurs is to have a business that operates independently of them – with the best way of doing that being a limited company structure.

That goal is almost impossible if you’re a sole trader, because you are the business. Even if you have employees who can deal with the day-to-day running of the business, ultimately every decision is made in your name, so you’re unlikely to delegate complete control to someone else.

The same is true of a partnership. Yes, you could leave the running of the business to the other partners (if they let you), but your name is still above the door so you will still be responsible for the decisions they make.

So, if you started a business as a sole trader or a partnership and you’re aiming for a business that can run independently of you, it’s time to seriously consider changing your business to a limited company. In this article, I’m going to explain why.

With a limited company structure, the ownership and management are split. The company is owned by shareholders but the day to day running of the business is left to the directors. Decisions are made in the name of the company, not your name, so you’re protected from any personal liability.

Now, in the vast majority of cases, the shareholders and directors will be the same people, especially in the early days, but the point is, they don’t have to be. If you don’t have to make all of the decisions, the business can run independently of you, but you can still own all or part of it.

The next benefit of a limited company structure is that the business can grow quicker than a sole trader or partnership meaning you can usually achieve your goal faster. This is because an investor can acquire shares in the business or you can offer shares as an incentive to help secure key staff to the long-term future of the business.

As a sole trader, all you can do is offer people a share of the profits. As a partnership, you could offer a share of the profits or the possibility of becoming a partner.

However, for many people, neither of these options are particularly attractive. First, there may not be any profits, or not enough to give a sufficient return on investment. Second, an investor probably won’t want to be a partner and take on the personal responsibility that comes with this position. Thirdly, you may not want all of your staff to be partners, because this would make running the business completely unmanageable.

With shares, you don’t have these problems. The value of shares can increase even if the company isn’t profitable so they can still be attractive to investors. You can incentivise your staff by giving them (or allowing them to earn) a share of ownership but, as explained above, they don’t have to be involved in running the business.

In addition to all of this, you then have the advantages of potential tax savings and limitations of liability that we discussed in my previous article.

Convinced by a limited company structure yet?

Assuming you are, or you’re at least giving it serious consideration, when is the best time to change to a limited company structure?

There’s no right or wrong answer here, but personally I would do it sooner rather than later. The more your business develops, the more complicated it will be to change structures later. This will then cost you more in professional fees to make sure the whole process is carried out correctly.

Once you’ve made the decision to change, how do you actually do this?

Your first task is to incorporate the company. This is nice and simple – just complete the forms and pay your fee to Companies House. However, you will need to decide who the shareholders and directors will be, and how many shares each shareholder will have. Everyone could have an equal number or you can split them in whatever proportions you choose.

Once formed, the company will be an empty shell so the whole business will need to be transferred into it. This means all of your ongoing contracts with, for example employees, clients, suppliers, and perhaps your landlord will need to be transferred to it, or new contracts entered into.

If you own any business assets (including any intellectual property) these will also need to be transferred to the company, or at least the company will need permission to use them.

The company will then need a new bank account, it may need to register for VAT etc, etc.

This is why I say that you should probably change to a limited company structure sooner rather than later. The longer your business has been running, the more you will have to transfer.

Once everything has been transferred to the company and it’s up and running, you can really focus on building a business that runs independently of you.

So, if you’re already running a business as a sole trader or partnership, please give serious consideration to changing structures. If you’re still thinking about starting a business, and after my last article you were undecided about the right structure for you, I hope this article has made the decision a little easier.

If you have any questions about changing business structures, please feel free to email me at editors@businessadvice.co.uk. If you’ve found what I said useful, have a look at some of my other contributions to Business Advice.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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