There are many ways for a group of small business people to go into business together. One person can go it on their own, known as sole proprietorship. Two people can go into business together, forming a partnership, but if a group goes into business together, they have the choice of forming a corporation or a ltd. company. For most small business owners, a limited company is the best way to go.
What is a Ltd. Company?
Probably the best way to explain what a Ltd. company is, is by explaining how it is different than a corporation. Corporations require that the company have a group of investors who meet at least once a year to make decisions on the direction of the company. Corporations also require that by-laws be in place for the day to day running. But the biggest difference is between the limited liability company and the sole proprietorship. If something goes wrong with the sole proprietorship, the burden is solely on the owner. The company bankrupting can ruin the sole proprietor, but with a ltd. company, the credit burden shifts to the company, rather than the individual.
The History of Ltd. Companies
While there is some precedent for ltd. companies in the way monasteries and guilds were handled in the 1500’s, the real basis of the modern limited company comes from Germany in the 1850’s. This way of starting a small business was a huge boon to the economy, and European countries quickly followed suit. Throughout the end of the 19th century, and into the 20th, many versions of the limited liability company were tried out in various US states, but it wasn’t until 1977 that Wyoming passed laws for a limited liability company that was based on the original German model. Other states eventually caught on, and now limited companies are available across the nation.
The Advantages of Ltd. Companies
The main advantages of a limited liability company are right in the title: the financial liability that each member bears is limited. In addition, limited companies take a lot less work to set up, and are easier to maintain for a small business partnership. The choice of tax structure is very appealing to some, as you can decide how taxes will be deducted from a limited company, whether it’s taken from each member’s personal profits, or from the profits of the company as a whole. Some companies may find one to allow them to keep more money, though the difficulty in calculating for an entire company may play a huge part in this decision.
The Disadvantages of a Ltd. Company
Public perception of ltd. companies is probably one of the biggest hurdles that people looking to start such a company face. Unless you have all the capital you need, this could be a problem, as investors tend to be a bit more skittish about limited companies. A company which aspires to spread over multiple states or even multiple countries may find the ltd. company structure to be too confining as it grows. Especially problematic are the slightly different laws regarding this kind of company that each place has. If you want your business to spread, you may find yourself dealing with one set of laws in one area, and another set of laws somewhere else, which can be an administration headache.
Who Should Consider Starting a Ltd. Company?
Ltd. or commonly refereed to Limited companies are best for a large group of people looking to start a small business. If there is only one person starting a company, a sole proprietorship is easier to start up and maintain, and the tax burden is generally lighter. However, if there are multiple people involved, a limited company is a much better choice. Remember, Don’t let this decision stress you out too much because it’s possible to convert your structure type from one to the other further down the line when your business grows.
If you have some partners and a business plan, a limited company is the easiest choice for many. As a bonus, it can make the most financial and asset protection sense, though how much of a benefit can be different from place to place so check your jurisdictions fine print and corporate laws carefully before making a final decision, and better yet call a small business expert like James.