Should I Start or Join a Limited Liability Company (Ltd)?

Thinking of starting a business or trade?  Where do you start?

Do you know the differences between Self Employed Sole Traders, Partnerships and Limited Companies? 

See: Should I Go Self Employed?  Should I Go Traditional Partnership?  Should I Go Limited Partnership?  S/E v Ltd Co.  Take Home Pay

This video/article focuses on limited companies.  Let’s look at what a limited company is before looking at how you one set up.

What is a Limited Company?

A Limited Company is separate legal entity to yourself.  It exists in its own right and therefore has its own HMRC tax reference number, registered address, company registration number and VAT registration (if applicable).

• It is established with a Memorandum and Articles of Association document.  This the ‘written and legal constitution’ of the company.
• The articles include the company’s name, its rules, and what its trade/purpose is.
• The company has a ‘legal identity’ with its name, articles and trade details must be registered at Companies House also with details of the Authorised and Issued Share Capital, e.g., 4 X £1 shares.  £4 from the business owners/shareholders is then ‘theoretically’ deposited in the new company bank account (when opened). 
• Whoever invested the £4 to establish the company are the shareholders e.g.  a husband and wife, £2 each = 2 shares each i.e., they own the limited company 50%/50% with equal voting rights (you can set up different types of shares with different rights to dividends or voting rights although this is not common for most companies).
• The minimum number of shareholders can be 1 (a one person/sole owner shareholder)
• One shareholder will be designated as the person with significant control (PSC) and is someone who owns or controls your company.  They're sometimes called 'beneficial owners' and usually will be appointed as the Company Director/Managing Director.  There can be other directors involved in the decision making for the business.
• There must also be a Company Secretary (can be the director also) who is responsible for signing off company accounts, VAT returns, corporation taxes and filing/reporting each to the relevant authorities.
• Limited Companies are where the liabilities of the company are limited to the assets within the company e.g., on day 1, the company is worth £4 and that is what shareholders would lose if the company went into liquidation. 
• Shareholder’s personal assets are not at risk and are protected as there is limited liability for the company, this may encourage directors to expand the business by taking on more debt without concerns that their personal assets are at risk if the firm fails.
• It may encourage directors to expand to become a much larger partnership employing hundreds of people without worries that if it fails, they are personally liable.
• Directors/shareholders can also lend money to the company as ‘Directors Loans’ to get the business ‘up and running’ or even expand and these can be repaid at any time.
• Unlike Limited Liability Partnerships (LLPs), Limited Companies can also ‘capital raise’ against the value of the company/value of the shares or by future profits/growth of the company e.g., by issuing more shares.  This can be for a small firm looking to attract investors or even a much bigger company where this is technically what happens when companies ‘float’ on a stock exchange and existing shareholders ‘sell off’ some or a whole share of the business for owners to realise their value/equity in the business as well.  Investors are usually looking for future profit/growth when buying shares.
• Profits are subject to corporation taxes.
• Net profits can then be retained profit in the business for development of the business or can be distributed to shareholders in the form of dividends.

Setting Up and Running a Limited Company

• Draft the Memorandum and Articles of Association document or buy an ‘off the shelf’ package form a Company Formations Company or even direct with Companies House.
• Open a company bank account.
• Start trading.
• There are no partners, only Shareholders (that do not work in the business), Director/Shareholders who are also employees and then normal employers.
• Shareholders and Director/Shareholders are entitled to dividends (distribution of profits after tax).
• There is a £500 pa personal dividend allowance.
• Dividends paid within Basic Rate Tax band (20%) are taxed at 8.75%.
• Dividends in Higher Rate Tax band (40%) are taxed at 33.75%.
• Dividends in Additional Rate Tax band (45%) are taxed at 39.35%.
• Director/Shareholders are employees and are paid PAYE salary in the same way as well as any other ‘normal’ employee.
• Each year, a Confirmation Statement must be sent to Companies House confirming any changes in ownership of the company.
• Each year, a Profit & Loss Account (that year’s income less expenses report) and Balance Sheet (the company’s assets less liabilities position at company year end) must be produced and sent to both HMRC (to pay corporation taxes) and to Companies House as Balance Sheets are technically public documents that anyone can view.

Pros and Cons of LLP

• The obvious advantage is the limited liability position when/if the business grows bigger with larger liabilities and then collapses unlike a traditional partnership or self employed.
• There is more paperwork to complete for a Limited Company.
• A Limited Company can raise capital based upon its ‘share value’.

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