Company formation, United Kingdom

Reasons to Form a UK Limited Company

Why incorporating in UK?

The main feature of the UK limited company is the limited liability of the shareholders. Although the company itself is responsible for paying all the debts incurred in the course of trading, the liability of the shareholders is limited to the amount of capital they put into the company.

The company has a legal identity separate from the identity of its shareholders. The company enters into contracts and agreements in the company name. This separate legal identity gives the company continuity and means that directors and shareholders can change without altering the company’s name, image or identity. This permanence gives more security to the stakeholders of the company such as creditors, employees and customers. Internally the structure and rules applying to a company can help to regulate the tasks and powers of management.

The allocation of shares and appointment of directors shows clearly the role of each person in the management of the company. The allocation of voting power and rules for meetings give a formal structure to decision making within the company. This formal structure also helps small companies to encourage their employees by allotting shares to them and giving them a stake in the fortunes of the company. This is also encouraged by tax legislation in countries such as the UK which has introduced tax relief for enterprise management incentives. The formation of a company gives the business an air of permanence and instills confidence in people dealing with the company. In certain countries a company is trusted more than an unincorporated business and some people may not deal with an enterprise at all unless it is incorporated.

Company status gives the customers and creditors more confidence in the business and it is easier for a company to find trading partners. Enterprises intending to trade in certain countries should therefore consider the advantages of forming a UK limited company. In some cases a company can obtain more deductions for expenses incurred than an unincorporated business. The company can also obtain types of tax relief that are not available to unincorporated entities. For example in the UK the tax relief for research and development expenditure is only available to companies.

An enterprise that is engaging in research and development should therefore consider incorporation to access this tax relief. Formation of a company may also give the shareholders more flexibility in their own tax arrangements. They can arrange the method of taking payment through salaries or dividends, and the timing of payments, in a tax efficient way to ensure they are not paying unnecessary amounts of personal income tax. The formation of a company may therefore bring opportunities for personal tax planning. The above advantages are potentially very beneficial for directors and shareholders. All potential businesses should therefore consider forming a company.

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