An Introduction to UK Limited Companies
Deciding if/when to incorporate your business is an important consideration that many entrepreneurs will face in the life-cycle of their business.
Before a decision can be made as to whether incorporation is right for you, it is important to be aware of what a limited company is, and how it differs from operating as a sole trader/partnership.
What is a limited company (Ltd)?
A UK private limited company is a separate legal entity, with its own assets and liabilities. When operating as a sole-trader or a partnership, assets and liabilities of the business will belong to the individual or partner.
Companies are owned by shareholders through the issue of shares. If you own shares in company (which may be purchased from another shareholder, or issued directly from the company), then you will obtain certain rights that attach to the share(s) that you own.
The rights that come with “ordinary shares” typically include:
- A vote in shareholder meetings;
- Dividends; and
- Assets on a winding up.
However, it is important to note that not all shares carry will carry these rights.
A company is run by the directors. Company directors manage the company’s business, will make strategic decisions, and will seek to ensure that the company meets its obligations. The Companies Act 2006 imposes a number of duties on directors, including: promoting the success of the company, making decisions independently, and avoiding any conflicts of interest.
A shareholder may also be a director of the company, meaning they will responsibility over the running of the business, and will also have a financial interest in the success (or failure) of the business.
Shares in a private limited company cannot be bought or sold on the public stock markets.
Benefits of Incorporation
1) One of the key differences between a limited company and a sole-trader/partnership is that a company is a legal entity in its own right, and has limited liability. The liability for the debts of the company cannot exceed the share capital invested in the company by the shareholders.
Self-employed individuals and partners have unlimited liability and are personally liable for all debts of the business.
2) Tax planning – profits can be retained in the company for future investment, rather than distributed to shareholders.
3) Companies may be perceived as more credible and reliable, which can make it easier to borrow money, raise capital and achieve financing with less personal risk.
Drawbacks of Incorporation
As a company is a separate legal entity, there are additional costs and administrative reporting involved in setting up and running a company, including:
- Submitting a Company Tax return for each accounting period (normally 1 year), and paying corporation tax on relevant company profits.
- Submitting annual accounts to Companies House.
- Keeping the company register up to date with any relevant changes.
- Submitting a Confirmation Statement each year (details of officers, registered office address, people with significant control etc).
Thinking of incorporating?
For bespoke advice on the most beneficial structure for your business, please contact a member of our team.