Advantages

A limited company has the advantage of being considered as a separate legal entity from the people who own it. If your business gets into debt, it is the limited company which is initially in trouble and not you.

If you run a business which runs a risk of not being paid by your customers then you would not normally be personally liable for your company’s debts caused by the lack of funds. You can pay yourself with dividends instead of salar5y fees, thereby saving National Insurance. Also some home- based businesses are more or less forced to be limited companies. Certain computer programmers, for example, cannot be given work from large contractors unless they run a limited company.1

1. Limited liability

The corporate form of organization allows investors to limit their liability. Owners of corporate shares are liable only for the dollar value of their original or any subsequent. Other shareholder assets are not at risk. Protection of personal assets is a chief factor in many investment decisions, both by the owners as well as potential investors.

Many banks or other lenders, recognizing the legal protection of assets afforded to corporate borrowers, require the borrower to personally guarantee any loan to the corporate entity, making the borrower personally liable. When a company is small, it generally is not possible to avoid giving personal guarantees. As the company becomes larger and accumulates more assets, the less these guarantees will be necessary. “Piercing the corporate veil,” where you are responsible regardless of corporate structure, is also possible in other circumstances such as waste disposal and fraud. While piercing the corporate veil, thereby bypassing the limited corporate liability is not common, it is being done much more frequently.

2. Perpetuity

While the sole proprietorship and the partnerships dissolve with the death or disability of the individuals involved, the corporate entity does not; as a legal entity it can exist in perpetuity. The corporate entity exists beyond the lives of any individuals; business can continue as usual, despite any personal tragedies that could occur in sole proprietorships or small partnerships.

3. Funding sources

Based on the potential for limited liability and the fact that the corporate entity has a record of accomplishments separate from that of individuals, the corporate form of ownership makes it possible to raise money from investors. Assuming that the corporation is sound and profitable, the capital that can be raised is limited only by the number of shares authorized by the corporate charter that are available. The charter can be amended as capital needs expand.

4. Transfer of ownership

Ownership of a corporation is determined by the shares owned. As a shareholder you do not own the corporation or its assets directly; however you can own a share in the corporation. The organization carries in its business irrespective of share ownership. Shares can be sold transferred to either individuals, corporations, pension funds, mutual funds, or other investment vehicles. Despite all these stock transactions, the business of the corporation continues without any noticeable effect.

5. Separation of ownership and management

Too often, the growth of the corporation is limited by the skills, knowledge, expertise, or experience of the founders. The corporate form of organization allows the company to draw on an expanded pool of talent. It can utilize its officers or board of directors as sources of funds, and with the addition capital, the company can attract and hire the best available talent. Further, the corporate form of organization allows the separation of ownership and management. As organization grows, operating them becomes increasingly sophisticated and complex. The owners need not operate the organization. To run it in their place, they hire trained managers who may not, and probably do not, own any major share of the company. Many talented people are only too happy to work as managers. Correspondingly, many business schools are happy to train and supply managerial talent.

6. Expansion and contraction

Since the corporation has a life of its own and can raise needed capital, it is easy to expand as the marketplace dictates. Contraction is more difficult, however, since cutting back requires sacrifice; people lose jobs, income, and homes. The company loses size and prestige, and it is often difficult to admit that management is wrong and needs to cut back.2

1 How To Start A Business From Home (Third Edition) - Grahan Jones

How To Books Ltd (1994) P.83

2 Small Business Management - A Planning Approach - Joel Corman & Robert N. Lussier

Times Mirror Higher Education Group, Inc. company (1996) P.35

P.28