Generally, we only recommend one business structure and that’s a Limited Company. It has the most credibility, it’s agile in terms of owners/management and it’s usually most tax efficient. So that’s it, see you later. Perhaps we could explain more…
What Structures are there?
Generally, when starting a business, there are 4 main structures to choose from. Sole Trader, Partnership, Limited Liability Partnership and Limited Company.
A Sole Trader and Partnership is essentially the same thing (except with a partnership there are two people).
An LLP is taxed as a partnership, but has limited liability like a Limited Company.
What is a Limited Company?
A Limited Company is simply a type of business entity. There are two types of Company. The first (which we will be talking about) is a Private Limited Company (Ltd). The second is a Public Limited Company (Plc). The main difference being that a Plc can trade its shares on the stock market.
We will be focusing on the most popular, Private Limited Company (Ltd).
As a brief introduction to a Limited Company, here are some points to better explain what a limited company is and we will talk about them in more detail later:
- Under a limited company structure, your company and personal finances are kept separate
- A limited company is a completely separate legal entity to its owners
- A limited company is owned by its shareholders
- Limited companies are subject to corporation tax on their profits
- Limited companies have directors, who are responsible for the day to day running of the company
- A director can also be a shareholder
- Limited company directors and shareholders have more legal, financial and administrative responsibility than sole traders and partnerships
- If things go wrong and a limited company fails, it’s owners and directors liability is limited only to the amount of shares invested; they have limited liability (Oh, so that's where the name comes from!)
- A private limited company cannot offer its shares on the stock market
- Limited companies are registered with Companies House
- Limited companies are required to produce two sets of statutory accounts; Full Accounts and Abbreviated Accounts, as well as submitting a Confirmation Statement and Company Tax Return
- As the owner of a limited company, you are still required to submit a personal tax return each year
Positions within a Limited Company
The shareholders of a limited company are simply the owners of the business. This could be one persona owning a single £1 share, it could be a husband and wife owning one £1 share each or it could be 50 different individual entities (including other limited companies) owning differing amounts each. The shareholders collectively own the company and are also known as the ‘members’.
- The shareholders have a number of rights within the limited company:
- The right to vote
- The right to propose resolutions
- The right to share in a distribution of the company’s income (dividend)
- The right to purchase new shares in the company
- The right to the company’s assets during liquidation
However, shareholders rights to the company’s assets are subordinate to the rights of the company’s creditors. This means that if the company goes bust, everything that the company owes will be paid first, leaving the shareholders with whatever is left (if anything).
A director’s job is to oversee the company’s day to day activities. The directors are chosen by the shareholders and are bound by a set of bylaws which states that the directors should act in the best interests of the shareholders.
In most small limited companies, the director(s) and shareholder(s) are the same person.
It is the responsibility of the director(s) to ensure the company keeps up to date and proper accounting records and ensures that the company delivers annual accounts to Companies House and HM Revenue & Customs.
A limited company can have any number of directors from a minimum of 1.
Day to Day Stuff
Generally speaking, a limited company has more legislation and regulations to stick to. This can change the way some businesses operate, on a daily basis. In reality, not a lot changes, but here’s what is legally required of a limited company:
The Registered number and registered office must be shown on the company’s headed paper (Just like a VAT number)
The registered number & address must be shown on all electronic communication (including e-mail & website)
If you are a sole director, the way you take money out of the company may change slightly (see ‘How to pay yourself’)
Advantages of a Limited Company
Should the worst happen, and the company owes money, the shareholders are only liable to pay the amount up to their shares. So, for example, if a shareholder has a £1 share, he would only have to pay £1 as his liability is limited to his investment in the company. As the Limited Company is a separate legal entity, it is the company that is sued, not the individual.
However, there are cases where the Director/Shareholder can be liable if found negligent, so behave.
Depending on profit levels, it’s likely that it could be much more tax efficient to trade as a limited company, in comparison to a sole trader. Even with £1 profit it’ll be more tax efficient. This is due to a lower Corporation Tax Rate on profits, and how to take money from the business (by dividends). This is tax savings 101 and all accountants will employ this method.
With limited company status, comes added credibility. A limited company is seen as a much more stable structure than a sole trader, so you’ll start to notice better relationships with suppliers, customers and other stakeholders.
Banks & investors see limited companies in a whole different light than sole traders. This is due to the added security of limited liability and a more stable structure, meaning it’s much more likely to attain investment or raise capital.
Protection of your business name
When you register a limited company, you also register the name. With this registration comes protection that no one else can register a business in that name, whilst you hold it.
In a sole traderhsip, if the owner dies (touch wood!) so does the business. However, in a limited company the business will have continuity as the business will pass on without the owner.
Disadvantages of Limited Company
Accountancy fees cost
Most accountants would charge more to look after a Limited Company because they are a rip off – we don’t.
As we said before, with a limited company comes more rules and regulations to stick too. But, with a great accountant who can talk normal people language – this won’t be a problem for you!
Company information available
Certain information is available online by anyone from the Companies House registrar. This included the company address, information on when the accounts are due and the previous submitted abbreviated accounts. But, Sales, Profit and company performance are not available.
What to do now?
Set up a Limited Company and get going. You can do this yourself for £12, or pay us £49 plus VAT and make sure it’s done right.
Don’t forget, look out for our next blog in the series: Bookkeeping
If you missed our previous blog in the series, Branding, take a look here.
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