Starting a business in the UK offers multiple options for the business structure. The Limited Company business structure is one of the safest and most popular in this regard, as it is a separate legal entity from its owners. Therefore, offering liability protection for business owners and shareholders.
Establishing a limited Company is a good decision if you are planning to scale your business, need to secure funding and/or big contracts, as well as a large business. Here’s a brief guide on everything you need to know about it.
What Is a Limited Company?
A Limited Company is a separate legal entity from its owners. This means that the business and the business owners are two separate things and hold their own legal value. In such a business structure, the personal assets of the shareholders remain immune to the business debts, losses or claims.
For a limited company, there should be at least one director responsible for managing the company, with numerous shareholders as well. In the UK, such companies must be registered with Companies House.
There are various types of Limited Company business structures.
- Private Limited Company (Ltd) – Shares of the company are held privately and are not available for public sale/purchase. It is an ideal option for medium-sized businesses.
- Public Limited Company (PLC) – Shares are publicly available for sale/purchase on the stock market. It works well for large businesses and organisations.
How It Works?
Understanding how a limited company works is essential to benefit from the structure and understand its liabilities.
Legal separation
A Limited Company holds a separate legal reputation. This means that the company has its own assets, incurs debts, goes into contracts and can sue or be sued. This legal specification ensures the protection of the personal assets of its directors and shareholders from inefficiencies caused by the company.
Key roles
There are two key roles in a limited company: Directors and Shareholders. Directors are responsible for managing the company, making strategic business decisions and ensuring legal + financial compliance. Shareholders, on the other hand, hold shares in the company and receive profits in the form of dividends.
Registration
The first step in starting a limited company in the UK is its legal registration. For which you must register with Companies House by providing;
- A unique, never-used-before business name.
- A registered company office address.
- Appoint at least one director.
- Issue shares to shareholders.
- Prepare Memorandum and Articles of Association.
Finances
Limited companies must maintain accurate financial records and file for corporate taxation on company profits. In addition, they are also responsible for filing annual accounts with Companies House and a Corporation Tax return to HMRC.
Profits/payments
As a director of a limited company, you can pay yourself in two ways: salaries and dividends. Salaries are subject to Income Tax and National Insurance, whereas Dividends are paid from profits after Corporation Tax.
Benefits
A limited company offers you the highest number of benefits in all of the business structures operating in the UK. Such as;
Liability protection
The most prominent benefit of a limited company is that your personal assets are protected against all sorts of business inefficiencies. Alternatively, you will be only responsible for your share/investment in the company.
Tax efficiency
Limited companies come with more tax efficiency because, as the profits grow, corporate tax becomes less compared to income tax. Plus, dividends are also taxed at lower rates than salaries.
Professional image
Operating your business under the structure of a limited company enhances its professional image and market reputation. It’s easier to secure funding, sign big contracts, and build trust among customers and business competitors alike.
Business continuity
A limited company continues to exist and operate independently. It doesn’t have any effect on the business if a director resigns, shareholders are replaced or ownership changes.
Name protection
Once your business is registered, your company name will be protected legally. This means no one can take your business name.
Tax System
As a limited company, you need to sign up for different taxes.
Corporate tax
Limited companies need to sign up for corporation taxation, which can range from 19% to 25% on the company’s profits.
Income tax (directors)
Directors of the limited company need to pay income tax on their salaries based on standard UK tax bands while also paying for National Insurance Contributions (NICs).
Divided tax
Dividends have lower tax rates than salary, and they also don’t need to sign up for National Insurance contributions.
VAT (Value Added Tax)
If your limited company exceeds the £90,000 threshold, you must register for VAT, charge VAT on your goods/services and file returns.
Tax filing protocols
Limited companies must file.
- Annual accounts to Companies House.
- Submit Confirmation statement.
- File Corporation Tax return to HMRC.
The allowable expenses for a limited company (no tax deduction on them) include: office, travel, Equipment, software, marketing, and Professional services (accountants, legal fees) costs.