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Limited Company FAQ

If you’re thinking of starting a business, or perhaps you’re a sole trader looking to make the move to becoming a limited company, here’s everything you need to know.

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What is a Limited Company?

A limited company is a structure that separates the business owner(s) from the business itself. In other words, the business becomes a distinct legal person or entity in its own right. This is different from a sole trader or sole proprietor, where the ‘business’ and the ‘person’ are the same, for legal and tax purposes.

As a separate legal entity, a limited company can enter into contracts and bear responsibility for its own actions, finances, assets and liabilities.

What Does ‘Limited Liability’ Mean?

Limited liability is the extent of financial responsibility a shareholder has for company debts. The owners of a company (its shareholders) are protected by ‘limited liability’, which means that the personal finances and assets of the individual shareholder(s) are protected beyond what they invest in shares to the company.

Limited liability is one of the main reasons for running a business as a limited company – in short, it reduces the financial risk for business owners.

Companies limited by shares must issue at least one share, and there is no upper limit to the number of shares. These shares are owned by shareholders, and the amount paid for each share is the limit of each shareholder’s liability. This can be a nominal amount such as £1 per share – it has nothing to do with the size of the business.

What are the Different Types of Limited Company?

A limited company must be registered at Companies House (the UK registrar of companies) as either ‘limited by shares’ or ‘limited by guarantee’:

Company limited by shares: this is the most common structure for small and medium-sized businesses. Liability rests with the shareholders but is limited by the nominal value of the shares that they hold. If the company ever became insolvent, each shareholder would only be liable to the extent of their original investment. It’s the best option for people who want to run a business for profit but minimise their personal financial risk.

Company limited by guarantee: this is usually only used by non-profit organisations where any profits or surplus are reinvested into the organisation. There are no shareholders, only directors or guarantors. They are only liable for business debts up to the amount that they guarantee.

A limited by shares company is the most common limited company structure, and for our purposes we will focus on this one. It is designed for people who want to run a profit-making business and keep surplus income for themselves.

Summary of Limited Companies

  • Most common type of company for SMEs.
  • Separate legal entity responsible for its own decisions, income, assets, debts and liabilities.
  • Owned by shareholders who buy shares in the company. Each shareholder’s percentage ownership depends on the number of the issued shares they own.
  • The financial liability of shareholders is limited to the number and original price (the ‘nominal value’) of their shares. No matter what are the debts of the business, if it is unable to pay its bills, shareholders are only required to contribute the nominal value of their shares.
  • Profits can be distributed to shareholders according to their ownership percentage. These profits are issued as dividend payments, though it’s common to reinvest a percentage of profits back into the business.
  • Shareholders appoint directors to manage business operations on their behalf. It is common (though not compulsory) for shareholders to be directors.

How Does a Limited Company Compare to Partnerships or Sole Proprietorships?

The sole trader or sole proprietor route – otherwise known as being self-employed – is actually the most popular way of running a business in the UK. It is estimated that there are 3.4 million sole proprietorships in the UK, 400,000 partnerships, and 1.9 million limited companies. So the number of registered limited companies is about half the number of unincorporated companies.

However, there are some significant disadvantages to operating as a sole proprietor. In particular, unincorporated businesses place unlimited liability on their owners because there is no legal distinction between the business and the individual. All business debts are the responsibility of the owners, so if a sole trader is sued or their business becomes insolvent, their personal finances and assets are at risk.

There are pros and cons to both the limited company and self-employed routes. Which one is best for you depends on your own particular circumstances, so it’s important to consider the key differences between these two business structures and what they mean for your business, as well as for you personally.

What are the Benefits of a Limited Company?

There are many benefits to setting up a limited company. Here’s a summary:

  • Limited liability: assuming no fraud has taken place, ‘limited liability’ means you won’t be personally liable for any financial losses made by the business, or any debts to be paid, or legal action against the company. A limited company therefore protects you in the event things go wrong. Those running a business as a sole proprietor do not enjoy such protection.
  • Tax efficiency: a limited company enjoys significant tax advantages over a sole proprietorship. It’s always advisable to seek professional help to ensure you make maximum use of the rules and regulations for things such as salaries, pensions, dividends and car ownership. But in general, if you operate as a limited company, you’re likely to pay less personal tax than as a sole proprietor.

In particular, limited company profits are subject to UK Corporation Tax, which for the current 2019/20 tax year is 19%. The Government plans to cut UK Corporation Tax to 17% in the next tax year starting in April 2020.

If you’re the director and shareholder of a limited company, you can take a small salary and draw most of your income in the form of dividends. Doing this means you can minimise your National Insurance Contributions (NICs), because limited company dividends are taxed separately, and are not subject to NICs. As a sole proprietor, however, your entire income is subject to NIC.

The bottom line is that running your business as a limited company could help you to take home more of your earnings. As a sole proprietor, there’s no distinction between business income and personal income.

  • Credibility and professional image: setting up a limited company is often a good idea if you’re a sole trader looking to expand your business, hire new people or if you want a more professional image. If you’re doing business with larger companies, they may prefer to deal only with limited companies, rather than sole proprietors or partnerships.
  • Easier to raise capital: because a limited company is a distinct entity from its owners, it may be easier for it to obtain loans and funding from banks or other lenders and investors. Attracting investment or raising funds can be difficult for any business, but it’s certainly easier if you operate as a registered company.
  • You can take on new shareholders: a limited company enables you to bring in partners and sell part of the business to other people. This makes it easy to sell a stake in the company, or transfer ownership of shares. If your limited company has more than one shareholder you should also draw up a Shareholders’ Agreement, which sets outs the rights and responsibilities of shareholders both in relation to the business and also to each other.
  • Distinct entity: a limited company is a legally separate entity from its owners. Everything from the company bank accounts, to the ownership of its assets, and any business relationships and contracts is for the company itself, and completely separate from the company’s shareholders. On the other hand, a sole proprietor and his/her business is treated as a single entity for tax and legal purposes.
  • Perpetual succession: a limited company will exist beyond the life of its shareholders. If they retire or resign (or even die), the company will continue to exist and operate, which provides security for employees, vendors/suppliers and customers. If a shareholder wishes to retire, sell his/her shareholding, or dies, it is much easier to transfer ownership of a limited company than an unincorporated business.
  • Your company name is protected: once your company is registered with Companies House, your company name is protected by law. No one else can use the same name or anything too similar. As a sole proprietor, someone else could trade under the same name as you, and there’s nothing you do about it.
  • Pensions: a limited company can fund its employees’ pensions as a legitimate business expense. This can offer tax benefits compared to those running their business as sole proprietors.

What Are the Disadvantages of a Limited Company?

Or course, there are also a few disadvantages to be aware of, including:

  • Additional filing and reporting requirements.
  • More complex accounting and taxation requirements.
  • Potentially higher administrative and accountancy costs.
  • Company information is a matter of public record; this includes details of directors, owners and people with significant control (PSC).

But in most cases, the benefits of a limited company far outweigh any disadvantages. And the good news is, you can use someone (such as an accounting firm) to do all of this work for you.

How Much Does it Cost to Set Up a Limited Company?

It’s probably cheaper than you think!

Many people prefer to operate as a sole proprietor rather than a limited company because they believe the start-up and running costs are much lower. It’s really not the case.

MJH Accountancy can help you to form a limited company from as little as £100, so the price of setting one up is actually minimal. We can also handle all of the administration involved with a limited company, including the preparation of your accounts and Companies House filings such as your annual Confirmation Statement (formerly known as the Annual Return).

How Do I Register a Limited Company?

Forming a limited company is quite straightforward. You can do it by going directly to Companies House or by using a formation agent or an accounting firm like MJH Accountancy.

Our role is to take care of all everything for you. We’ll ask you a few questions about what kind of company you need, the number and details of the shareholders and directors, the number of shares to be issued, then we’ll make sure all documentation is filed correctly. And of course, we can provide ongoing advice and support according to your needs.

To form a limited company, you’ll need at least one director and one shareholder. If you’re currently a sole trader and no one else is involved in your company, these can be the same person.

Alternatively, you may have a group of founders, in which case they can each be issued with a number of shares.

How Long Does it Take to Set Up a Limited Company?

The good news is that setting up a limited company can be done within a day, even within a few hours!

These days, the registration process with Companies House can all be completed online, so it’s usually possible to confirm of your company formation within three to five hours. It does depend on how busy the team at Companies House is on any given day, since they will need check everything before registering your company.

Once you have successfully registered your limited company, you’re ready to go. If you have a business bank account, you can start trading immediately.

Do I need a registered office?

Yes, your limited company will need a registered address. This can either be your home address, or your office address if you have one. Bear in mind that your company’s registered address is public information, available online at Companies House.

MJH Accountancy can also provide you with a registered address at our office when we set up your limited company. Many of our clients prefer to have a more professional registered address if they don’t already have one.

What About Taxes – Do I need to register separately with HMRC?

Yes, you do. You’ll need to register for Corporation Tax, and also for PAYE as an employer. We can help you do this. But don’t worry, it doesn’t have to be done at the same time as you register the company. It’s possible to register your limited company before you start trading.

At MJH Accountancy we can help you decide whether it makes sense for you to set up a limited company, whether it’s a new company or whether you currently operate as a sole proprietor. We offer a range of services to help you get your limited company set up, so don’t hesitate to get in touch and arrange a consultation with one of our experts. For a limited time we are offering free limited company set-up a part of introductory accounting package so get in touch below.

If your question is not answered here, please contact us at the form below and one of our advisors will be able to help.

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"MJH provides us with a very personal yet professional service. They have been very helpful in advising us on tax efficient structures"

Seamus Duggan, Lakefield Services

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