In this blog post, we’re going to talk about the real reason you should form a limited company.
If you are running a business as a sole trader and you are not a limited company, you may find what we have to say uncomfortable. But please hang in there because you need to know this.
One final point before we get started. Company formation is not for everyone, so this blog post is not about selling limited companies.
The point of this post is to tell you about a very real and potent underlying benefit of company formation. This is something we have discovered at 1st Formations only by interacting with hundreds of thousands of business customers over the years.
The generally accepted benefits of company formation
In the first instance, let’s quickly get out of the way the generally accepted benefits of forming a limited company.
First, we have limited liability. Personal financial risk is greatly reduced if you trade as a limited company, as the debts of the company are separated from your personal finances.
Next are tax and National Insurance benefits. A limited company provides scope to pay less for each of these.
Then, we have the protection offered to your company name, by registering it at Companies House. This is something you can’t do as a sole trader.
And, if you want to retire or sell your business, it’s normally much easier to transfer ownership of a limited company, than a non-registered business.
So, those are the well-known advantages of forming a limited company. But is there another benefit that is even more compelling? We think so…
The real reason to form a limited company
Quite simply, the real benefit and number 1 reason for forming a limited company is to be taken seriously.
The first year of a business’ life is often precarious, with one or two of the big decisions you make being the difference between survival and failure.
This may be hard to swallow for a lot of you out there, but the fact is, not too many people want to deal with a very small company if they can possibly avoid it.
By very small company, I am talking about
- one-person businesses
- unregistered companies
- sole traders; and
- businesses operating from home
So, in the early days of your business life, it may be worth your while seriously considering forming a limited company.
In business – size matters
The fact is, most people would much rather deal with a large and established company – because they trust it will deliver what it promises. In business terms, size does matter!
Being a big business means that it’s probably been around a while.
If it’s been around awhile – it’s probably because it’s successful.
If it’s successful – it’s probably because it’s good at what it does.
Right? Well yes – probably!
When someone is choosing a company to supply them with a product or service, the main thing on their mind is to reduce risk. They want to avoid something going wrong, and even if it does, they want to be secure in the knowledge that their chosen company is capable of fixing it quickly, with no hassle, and no additional costs.
Most people’s perception is that a big business has the resources and willingness to do these things. Whereas, many people may have doubts over a very small business to do the same.
So, having identified the stark reality that most people would rather deal with a big and established company, how do you avoid prospective customers dismissing your small business, before you even get the chance to speak to them?
Join ‘Club Limited’
Well, one way to be taken seriously is to form a limited company and get the word ‘LIMITED’ or ‘LTD’ at the end of your business name.
If you don’t have ‘LTD’ or ‘Limited’ at the end of your business name, you are recognised by everyone as a sole trader or unregistered company. Unfortunately, that is a tell-tale sign of being a small, micro-business that, while affordable – is a higher risk to deal with.
Ok, let’s ask ourselves a question: Are all big and established businesses trading as limited companies? The simple answer is yes. Unless of course, they are LLPs – in which case, they are still registered with Companies House.
The B2B sector
If you are in the business-to-business sector you will find it even tougher getting customers If you do not have ‘LTD’ or ‘Limited’ at the end of your business name.
Established companies and larger organisations have policies regarding which companies they will enter into contracts with. They will usually refuse outright to deal with unincorporated businesses.
Other reasons to prefer dealing with limited companies
Ok, so you may be thinking this is all very unfair and you disagree with our ‘big business’ scenario. You may hold the opinion that some people prefer to deal with small, one-person businesses because they are more personable.
This may be correct in certain circumstances; however, there is compelling evidence to suggest the majority of people have other good reasons to prefer dealing with limited companies.
For example, someone who forms a limited company wants to do things properly and create an ownership structure. They’re prepared to pay more for annual accounts, and they’re happy to have their company’s details displayed on public record. In other words, they have nothing to hide.
They also have a desire to access lending opportunities, and to build a bigger business from a solid foundation.
There is no getting away from it – if you do not trade as a limited company, you increase the chances that you never get those crucial early customers or business contracts. This could be the difference between survival and failure in the first year or two of business.
The bottom line…
The fundamental fact is;
CONFIDENCE is critical in business. A limited company has a coating of professionalism that can infuse confidence in your business and add that much-needed ingredient – CREDIBILITY.
So, there you have it! I hope this blog has been of some help and has not offended you. For me, success in business is about learning lessons, and not getting upset and offended. The reality of the business world is something we all need to accept, rather than reject or ignore.
If you have any questions about what we’ve covered today, please ask in the comments section below and we’ll get straight back to you!