What is a Limited Company? A quick guide

A limited company is a separate legal entity. That means, it’s responsible in its own right for everything it does, and the company’s finances are separate from the finances of the owners. This guarantees more protection for the owners and other shareholders if the company builds up debts that it can’t repay.

Read on for our quick explainer on ‘What is a limited company?

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• Did you know? With one of our company formation packages, you can form a limited company from just £9.99

 

What is Limited Liability?

With limited liability for the debts of a business, you can take calculated business risks because you are not going to lose everything if it goes wrong.

Many new businesses end up trading at a loss and need to borrow from banks or in the form of credit from suppliers. If the business can’t pay the money back it will be wound up and all the assets sold to pay back the creditors. But, with limited liability, your personal assets, such as your house and car, shouldn’t be at risk of being bundled in with the company’s assets.

 

Advantages of founding a Limited Company

Tax savings
Limited companies pay corporation tax which is set at a lower rate than the income tax paid by sole traders and partnerships.

As a director of a limited company, you can also take money from the company as dividends, rather than a salary, which can be more tax efficient. A salary is subject to employee and employer National Insurance contributions, but you don’t have to pay this if you take a dividend.

What’s more, a limited company can claim more in expenses and reliefs than a sole trader or a partnership. There are tax deductible costs which you can offset against a company’s profits, meaning you get to keep more of your money.

To understand how founding a limited company could affect the amount of tax you pay, you should speak to an accountant or company formation specialist.

Business reputation and investment
Compared to a sole trader or a partnership, a private limited company is a better business model for attracting long-term investment.

Shareholders accept that they may not see a return on their investment in the short-term. But, if a bank decides your business is performing badly it may suddenly demand repayment of the loan with all that could entail.

It’s also the case that by forming a limited company you are making it clear that your business is committed to sticking around. This should mean that other companies will be more willing to work with you than if you were a sole trader.

Finally, sole traders and partnerships generally have to raise capital from their own resources and sales. But with a limited company, you can sell shares to get funding for your company from new investors.

Build for the future
Shareholders will be more willing to wait for dividends until there is a decent profit to pay out. Banks, on the other hand, want interest payments to be made regardless of profit levels.

Name value
No two companies can be set up with the same name. This means you have sole use of your business name and it is protected for as long as the company exists. Sole traders don’t have the same protection.

It’s cheap to set up
With our company formation packages, you can register your limited company quickly and simply. There are four packages to choose from:

• E-Formation (£3.99): perfect if you want to secure a company name and don’t need any official printed documents.
• Essential (£19.99): offers you complete confidence that you’re starting a company with the rules and regulations covered.
• Entrepreneur (£59.99): kick-start your next big venture with official compliance and additional documents of incorporation.
• Super (£89.99): the complete secretarial and compliance package to establish your company on a robust footing.

Best of all, when you sign up for one of our company formation packages, we pay the £12 Companies House filing fee for you!

Entrepreneurship
You can build the company to sell and then build another business.

Pension pot
The company can pay into your pension from your pre-tax profits. This means it’s possible to build up your pension quicker.

 

Disadvantages of founding a Private Limited Company

Sources of conflict
A conflict between shareholders and directors is not uncommon. For instance, a shareholder may expect dividends to be paid out while the directors would prefer that profits be ploughed back into the business.

Paperwork and regulations
Forming a company involves creating legal documents which have to be updated. And this involves some time-consuming paperwork.

Companies have to produce more complicated accounts than partnerships or a sole trader and these are open to public scrutiny, meaning directors can’t keep their financial affairs completely private. There are also strict procedures governing the withdrawal of money from the business.

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RRP £220, SAVE 86%

Limited company

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Tax and accounting

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Confirmation statement

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On the public register, use our address as the business’s registered office address

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Registered office address:

On the public register, use our address as the business’s registered office address

Service address:

On the public register, use our address as all the directors service address

Mail forwarding:

Quick and efficient mail forwarding and junk mail filtering. No additional handling or postage fees.

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A 3 in 1 service that protects your privacy, all other directors privacy and includes our mail forwarding service.

Registered office address:

On the public register, use our address as the business’s registered office address

Service address:

On the public register, use our address as all the directors service address

Mail forwarding:

Quick and efficient mail forwarding and junk mail filtering. No additional handling or postage fees.

Knowledge hub

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The Formations Company and Companies House

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What is a Private Limited Company?

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How long does it take to register a new company?

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When should I change from sole trader to limited company?

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Limited Company Vs Sole Trader: Advantages and Disadvantages

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Setting up a limited company for contracting

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