There are many reasons why it may be better to incorporate a business into a limited company; some of which are too complex here and better left to the understanding of an accountant or solicitor. Other reasons for incorporation are more readily understandable and a brief explanation now follows;-
Limited Liability
By far the most often used explanation for incorporating is "limited liability". The legal risks in contract and tort are less in principle to those participants in the workings of a limited company than those borne entirely by the sole proprietor or partner in an unincorporated business. Nevertheless, it should be remembered that personal guarantees may be required on certain contracts usually from lending institutions such as banks. Meanwhile, each partner or sole proprietor bears the burden of any commercial risk of the firm subject only to any contractual protection that they may have been prudent enough to take out such as professional indemnity insurance.
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Name Protection
This is another very important consideration to be considered. When a Company is incorporated with a particular name it is designated with a number which features on it's Certificate of Incorporation and no other limited company can be incorporated with exactly the same name. The situation is totally different with unincorporated business; whilst it can be misleading, it is not uncommon to find several firms which are totally unrelated but have the same trading name. Occasionally, this can lead to an action for "passing off" but because of the complexities and the costs involved this is unusual.
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Funding
The borrowing potential is in theory more substantial for a company than a sole proprietor or partnership. A floating charge may be used to secure loan capital that is required by the company in order to further expansion; this facility is not available to partnerships or sole proprietors.
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Grants
Certain development grants are only available to limited companies.
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Management
Separation of the levels of responsibility are easier to accomplish in a company than they are in a partnership. A company can easily isolate management from ownership wholly or in part by means of a Board of Directors. A partnership must seek to rely on a partnership agreement which cannot rely on the generally understood concept of the Board of Directors.
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Perpetual Succession
Continuity without change applies to the corporate position of a company. The personalities of the company may change but since the company is in law a separate legal entity the contractual obligation owed to it and by it will continue subject to its eventual winding up.
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Taxation
The advantages or disadvantages of a company in this regard can change from year to year from budget to budget. However consideration should be given to fact that an employee of the company whether he be the Managing Director or a factory floor worker is still an employee of the Company and is subject to PAYE taxation. A partnership or sole proprietor is taxed on a self employed basis under schedule D. For a more detailed explanation of this aspect please contact your accountant.
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Publicity
A company creates more confidence in its ability to trade than a partnership since it is under an obligation to file accounts, annual returns and other such documents all of which are a matter of public record and freely available to suppliers, contractors and any other person or body having dealings with the company.
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