Specialist Limited Company Solutions

Limited companies

When starting up a new business, there are several options you can choose from. You can decide to operate as a sole trader, or you may prefer to set up as a limited company. But what does becoming a limited company actually mean?

To operate as a limited company, you will have to register the business as such. Limited companies have been registered in this manner to ensure that the owners have limited liability. The business is owned by its shareholders and operated by directors, and a private limited company needs to issue just £1 of shares to begin trading. Private limited companies must have at least one officer, and may not be listed on the Stock Exchange, unlike a Public Limited Company (PLC).

So those are the basic definitions of limited companies, but the real key is in the liability clause. By registering as a limited company, the limited liability means that if the company goes out of business, they owe their suppliers nothing and the owners will not, for example, lose their homes as a result of consequent claims. Directors of limited companies get paid a salary and a share in the profits, but the limited liability status means that exposure to bankruptcy is only £1 if it all goes wrong.

The definition of limited means that the company's finances are distinct from the personal finances of their owners. This is unlike a sole trader arrangement, where the owner is liable for the finances of the company. Shareholders in limited companies are not responsible for company debts, although if required, directors may guarantee loans or credit granted to the company against their own assets.

To trade as a limited company, the company must be registered with Companies House, filing annual accounts and an annual return each year to update Companies House with basic details relating to the company. This does carry a small charge.

HMRC must be informed if the company has any profits or taxable income in a financial year, and a limited company must complete an annual HMRC corporation tax return and pay the due taxes within nine months of its financial year end. Finally, anyone employed by the company must pay income tax and National Insurance contributions on their income.

Setting up a Limited Company

Companies House is responsible for registration of all limited companies in Great Britain. Before a business can trade under the limited title, it must register with Companies House. To do this, several documents need to be filed, either by you or by an intermediary such as an accountant or financial services professional:

• A Memorandum of Association – Includes the company name, location and type of business.
• Articles of association – Outlines director's powers and shareholder's rights.
• Form 10 – Provides Directors and company secretary's names and addresses, together with the registered company address.
• Form 12 – States that the company complies with the terms of the Companies Act.

All of these have to be submitted before a company can trade as a limited company.

Private limited companies, the most common set-up for small UK businesses, cannot offer shares to the public, but may have any number of shareholders. Private limited companies must also have at least one director to make daily management decisions as to the running of the company. Up until the 2006 Companies Act, it was also a legal requirement to have a company secretary, although that is now no longer the case. However, appointing a company secretary is a wise move and most private limited companies still do this.

Public limited companies differ in that they are allowed to offer shares in the business to the public to raise funds that are invested back into the company. Shares issued are to a minimum value of £50,000 and public limited companies must have at least two directors to make management decisions and a company secretary.

The liability issue is an obvious benefit for registering as a limited company but there are other, less obvious benefits too. Developing your business as a sole trader will give the impression to your customers that you are exactly what you say you are – a 'one man band'. By giving your company limited status, it can imply that your company is expanding and is a more stable partner to do business with. Limited companies are far more open to scrutiny, with all records being in the public domain (including tax returns). Limited companies can enjoy perhaps more of a measure of trust amongst their clients than a sole trader can.

As with all business and tax areas, limited companies face a minefield of paperwork, taxation legislation and company law. Most limited companies employ outside assistance to ensure that they comply with all the relevant paperwork and legislation. If you are thinking about registering as a limited company and would like to know more, contact Churchill-Knight and talk to one of our experts.