A limited company is a private company whose owners are legally responsible for its debts only to the extent of the money they invested. This makes the Company a separate entity. Meaning that your personal assets are more protected. A limited company structure is good for the flexibility of appointing shareholders, employing staff and can be tax efficient.
If you’re planning to set up a business, whether or not you want to trade right away, you will most likely use an ltd company structure. Though this is relatively simple to do, what many entrepreneurs aren’t precisely certain about is: what is an ltd company?
There are many benefits to setting up a limited company that not everyone knows about. We’ll explain what all the fuss is about in this article.
Private and Public Limited Company definitions
Let’s start with the ‘private limited company‘ definition. A private limited company is a structure that separates between the business owner and the business itself. For the purposes of the law, the business will become a separate legal person in its own right. As such, it can enter into contracts and bears responsibility for its actions – such as finances and any liabilities.
What are the benefits?
The obvious benefit is that this limits the liabilities of the business. In other words, if you’re the owner, you will not be liable for the debts of the company if it becomes insolvent, or any legal action against it. Setting up an Ltd company is often a good idea if you are a sole trader looking to expand your business, take on new people or want to look more professional.
If you’re wondering about the ‘public limited company’ definition, that’s simple. A public limited company is the same in terms of liability, however, its shares are offered to the public. Anyone can acquire these by trading on the stock market or during an initial public offering (IPO). There are advantages and disadvantages to this kind of set-up, however, which should be considered.
Types of Ltd company
Within the broader spectrum of limited companies, you’ll find several sub-divisions. These include:
Company limited by shares
This is the most popular structure, especially for small and medium-sized businesses. Liability rests with the shareholders and is limited by the value of the shares that they hold. So, if the company were to go insolvent, each director would only be liable for the share of their original investment. It’s a good option for people who want to run a business for profit and keep the surplus revenue for themselves.
Company limited by guarantee
This is most likely to be used by a non-profit organisation where the profits are reinvested into the organisation. With this option, there are no shareholders. There are only directors or guarantors. Those guarantors are limited against business debt up to the amount that they guarantee.
How to set up an Ltd company
Starting an Ltd company is fairly straightforward. You can do it by going directly to Companies House or using a formations agent such as The Formations Company. Our role is to take care of all the details for you. We make sure all documentation has been filed correctly and provide ongoing advice and support.
To become an Ltd company, you will need at least one director and one shareholder. If you’re a sole trader and aren’t involving anyone else in your company these can be the same person. Or, you may have a group of founders, in which case they can each be issued with several shares each.
You are protected if anything goes wrong as an Ltd company. Also, the amount of tax you have to pay should be reduced. Here’s why: once you set up an Ltd company, you will become an employee who is paid a wage. You can use this to bring your income down to a lower threshold while you make up the rest with dividends – these are taxed at a much lower rate.
If you’d like to know more about how we can help you set up an Ltd company, why not take a look at our company formation bundle options? Or, to keep browsing information and advice to help you first, check out the help centre.
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