A limited company is a type of business which you have to register as a legal person at Companies House. The owner of the company is completely separated from it. The company is registered into the contracts by company’s official name and its owner is not liable for any kind of actions or finances. The company itself is legally responsible for all actions, liabilities, and finances.
The owner of a business is protected by “limited liability”. It means:
• An owner is liable only for the business debts (depending upon the amount he has invested in the company).
• An owner is liable for the guarantees he made to the business.
It is mandatory to register a limited company as a company “limited by guarantee” or “limited by shares” at the Companies House. A ‘Limited by Shares’ company can have at least one shareholder or can be managed by at least one director of the company. Whereas, a company limited by guarantee is owned by at least one guarantor or handled by at least one director. The owner of the company can appoint himself as a director, so he can run the business on his own or by making partnership with others.
A ‘Limited by Shares’ Company
A company incorporated as a company limited by shares is the most famous company structure. This is a type of business run by one or more than one persons to earn profits. All the profits earned by the business are taken by the company’s owners as their income. Here’s more about this type of company –
• A registered business which is viewed as a legal person and liable for its assets, income, liabilities, and debts.
• This is the most common business type mostly used by startups.
• A profit-making company used by the people who want to earn income from the business activities.
• It is owned by one or more shareholders or members. To become the company’s shareholder, you have to buy at least one share in the businesses.
• The shareholders of the company enjoy limited liabilities. For example, if the company fails, the shareholders are liable to pay only for their shares in the company. Apart from the sum of shareholders’ debts, the business itself is liable to pay other debts.
• Profits of the business are distributed in the form of dividends among shareholders. The value of the profit issued to a shareholder depends on the shares he owns. Some amount of this total amount is reinvested in the company for its development.
• One or more directors are appointed to handle regular business activities by the shareholders. Most of the time, directors are selected from the shareholders of the company.
Why should you build a limited by shares business/company?
• If you really want to make wealth for yourself from a business then you should build a ‘Limited by Shares’ company.
• You can start this business by your own or by making a partnership with other people on your contact. This type of business is appropriate for existing sole traders as well as new businesses.
• A shareholder or member is not liable to pay all debts of the company. Being a shareholder, you have to pay the debts depend upon the shares you’ve in the company.
• Starting a company limited by shares is the most effective idea to explore your business and build a professional reputation in the market.
• The credibility and trust a business gain after incorporating it as a limited company excite other businesses to work with limited businesses or companies over sole traders.
‘Limited by Guarantee’ company
This is a non-profit business type and used by those persons who want to create a business just for non-profit organizations like charity and all. The profit made by the business is reinvested into it for further development rather than distributing it among its members. Have a complete overlook:
• A separated business is liable by itself for its actions, debts, assets, income, and liabilities.
• The company doesn’t have any shareholder. The business type is owned by the persons known as guarantors or members.
• To become the guarantor of a company, you have to submit a defined money amount to that company. In case, if the company becomes insolvent and can’t pay its debts, then a guarantor has to pay the debt depending on the amount he guaranteed.
• To manage daily business affairs, one or more directors are appointed by guarantors. Sometimes, they nominate themselves as the director of the company.
Why should you set up a ‘Limited by Guarantee’ company?
• If you want to organize a non-profit business then you should choose a ‘Limited by Guarantee’ company. The non-profit organizations can be charity, sports club, social enterprise, and more.
• To generate money just to promote social activities and social organizations rather than distributing it among members.
• To provide limited liabilities to the guarantors who are running the non-profit organisations.
• To create a well-defined position of your non-profit business in the market, because a limited company is considered more reliable and trustworthy than an unregistered business.
What is the meaning of “limited liability”?
Limited liability means a legal protection to company’s shareholders or members’ finances. Under this, a shareholder or guarantor is only liable to pay the company’s debts for the shares he owned in the company or the amount he has guaranteed. As a legal entity, the business itself is legally responsible for paying the rest bill. Limited Liability is the biggest reasons why people want to organize an LLP or limited company.
Liability of the Shareholders
A company limited by shares provides at least one share. There is no specified limit of shares a company can issue. To become a member of a company limited by shares, you have to buy at least one share of that company. The amount a shareholder pay describes his limited liability. For example, a business is issuing 200 shares with a minimum rate of £1 for each. There are 10 shareholders of that company and each holds 20 shares. Then the amount each member has to pay in the company’s debts is £20. And the sum of the shareholders’ liabilities is £200.
Liability of the Guarantors
A company limited by guarantee doesn’t have any share or shareholder. It has guarantors also known as members. To become a guarantor, a person has to deposit the fixed amount of money known as guaranteed amount. The same he has to pay for the company’s debts. In most of the companies, for each guarantee, the nominal rate is £1 and this is liability limit of every guarantor.
Liability of the LLP members
As you may know, LLP’s don’t have any share and shareholder. The partners of the business are liable for the amount they have endowed in the business concern or specified in the written Agreement file. In case, if your business doesn’t reach its commercial obligations, members can provide guarantees to meet it.
How does limited liability compare with other types of business structures?
The owners of the unregistered businesses such as traditional partnerships and sole traders have no limited liabilities as there are no clear distinctions between a company and its owner. The owner of the company is liable for all debts and finances related to the business. In case, if the business becomes disrupt, the personal finances of its owners or members are in danger.
What are the benefits of a limited company type?
Limited liability is the major reason most of the people are choosing a limited company structure. There are infinite advantages like:
• Efficiency in tax
• Can be built by a single or multiple persons
• Provide opportunities to increase turnover
• Build credibility and professional image of the company
• A well-defined and protected business name
• Continuous achievements and development
Along with advantages, disadvantages also come. And here are some of them:
• Disclosure of company’s information in the public such as the detail of company’s owners, directors, and PSCs (people with significant control)
• Require addition reporting and filing
• Complicated accounting and taxation needs
• Higher accountancy and administrative costs
The advantages of a limited company are far greater than its disadvantages.
What are the tax advantages of a limited business/company?
When the annual financial gain of your company crosses or reaches £20,000, the limited business/company structure works as an extreme tax effective solution to your company. It is because a limited company has to submit flat 20 % business income tax on its profits. In this case, the directors of the companies can reduce their NIC (National Insurance Contributions) and personal tax by issuing them a combination of dividends and salary. If they want, they can postpone tax by leaving extra income in the account of the business and can withdraw the same in the upcoming tax year.
Whereas Sole traders or unincorporated businesses don’t have the similar tax benefits. The companies have to submit 20-45% tax no matter how much it earned and also have to pay Class 2 & 4 NI (National Insurance). The owners of an unincorporated company have no option to reduce their income tax and NI liabilities. Also, they can’t postpone income tax by leaving net income to withdraw it in the next tax year.
Efficiency in paying tax is another big reason most of the people go with a limited company. In fact, many sole traders are also converting into limited companies.
Compare Corporation Tax and Income Tax
As we have discussed above, the owner of a limited company has to pay 20% income tax on their all profits. The amount of income tax is fixed, not vary with the profit. But it is opposite in case, if a business is set up being an unincorporated or sole trader. In this matter, you are liable to deposit 20% tax on £45,000 earning, 40% of earning between £45 001-£150 000, and 45% on more than £150 000 profit. The rate of the income tax varies with the profit gain by the business.
The advantage to set a business as a limited company is that you can reduce the amount of tax and NIC liabilities. To get the most effective tax pay system, pay yourself in this way:
• For the tax year 2017-18, Class 1 NI Threshold for a director’s salary is £8,164. There is zero income tax on this income. So set a director’s salary up to £8,164 amount and save yourself from any kind of tax.
• Raise your wage by adding dividends into it. A company can separate dividends only if it has available profits. The members of the company can distribute them in the tax year end. Initial £5,000 of the total dividend earning in a tax year is free. The dividend tax is submitted above this fixed amount. But, you’re not liable to submit any tax/NIC on the dividends as it has already submitted its 20% business tax.
The PAYE method is used to deposit the Class 1 NI of the employer on the salary of company’s director.
Employer’s salaries and NI are already tax-deductible, so you don’t have to pay any tax on this income. In this way, you can reduce your tax and NI liabilities whereas a sole trader can’t do this.
Leaving extra cash in your business account
Being associated with a limited company, you may save some of your income in the company’s account to use it later. In case if you don’t need all of the funds, postpone your tax by withdrawing your net earnings in the future when it is tax-efficient for you.
Being a sole trader, you can’t reach these benefits as there is no difference in personal and business income. The income tax and NI on all profits of a year have to be submitted within the same tax year. It can’t be deferred.
What to do to incorporate a limited company?
Want to incorporate your business as a limited company? Contact ZDK Formations. We provide numerous formation packages for the businesses limited by shares. Or if you want to register your business as a company limited by guarantee, you may talk to us. Our tailored packages are only for those who want to start a ‘Limited by Guarantee’ company. The registration process is quite simple and affordable. The initial rates start from £9.99 and VAT. To incorporate a newly started company as a limited company, you need to consider these given steps:
• Decide a name for your company
• Browse the list of formation packages for the companies and select one as per your business
• Choose a relevant address for your company
• Fill the online registration form available on the website
• Now, deposit this application form to the Companies House
Once you done with these simple steps, your new business should be incorporated at Companies House within the next 3 working hours. After this, you will get your business documents soon and can initiate the trading process as you want. For the detailed description on how to build a company limited by share or guarantee, you many visit our official website or talk to our support team.