What is a limited company?

Running your own business isn’t for the faint-hearted, but most business owners will tell you that the payoff is worth it. Freedom, flexibility and the ability to pocket after-tax profits are all rewards a hard-working self-employed person can reap.

When we decide to start a small business, one of the first decisions that needs to be made is what type of business you will trade under. The limited company is a popular choice for small business owners, but what exactly does this mean?

What is a limited company?

Most of the time, ‘limited company’ refers to a business ‘limited by shares’, which means it’s owned by shareholders. The other type of limited company is a business ‘limited by guarantee’, but these are generally non-profit rather than profit-making enterprises.

Here are some of the features which define a limited company:

1. It’s a legal entity

A limited company is a business which is a legal entity in its own right. This means it’s separate from those who run it in the eyes of the law (and the taxman).

2. It has a certain core structure

In terms of structure, there must be an owner, a director and at least one shareholder in a limited company – but these can all be the same person.

3. It offers limited liability

If a limited company runs into debt, these debts are not tied to one individual. So, limited company debt is not considered the personal debts of the owners, directors or shareholders, but rather of the company itself. This is known as ‘limited liability’.

4. Business finances must be separate

With a limited company, business finances are separate from the owner/ director’s personal finances. This is a legal requirement – and means that the company must have a business bank account and follow a strict set of accounting rules in accordance with HMRC.

5. It must have a name

Unsurprisingly, a limited company must have a name. This name must be unique (not already assigned to another company) and it must be registered on Companies House. This is different to a sole trader business, which can be run under the sole trader’s own name.

What types of limited company are there?

As previously mentioned, a limited company can include those ‘limited by shares’ and those ‘limited by guarantee’.

There are two further types of limited company:

1. A private limited company (requiring the suffix ‘Limited’ or ‘Ltd’ after the company name)
2. A public limited company (which is followed by ‘PLC’).

The main differences are that public limited companies must have more than one director, whereas private limited companies only require one. Further, private limited companies can’t list their shares on the London Stock Exchange to raise capital, whereas PLCs can.

Most small business owners who form limited companies form private limited companies rather than public ones.

What are the benefits of a limited company?

1. More tax efficient

One of the main benefits of forming a limited company over other forms of self-employment is that you can take advantage of certain legal tax breaks. For example, as director, you can draw a small salary and pay yourself dividends, meaning less Income Tax and National Insurance. You could also assign shares to your spouse or other family to share the profits around, therefore paying less tax on them. Specialist limited company accountants can help you take advantage of these allowances and operate as tax efficiently as possible.

2. Limited liability

With a limited company, the owners, directors and shareholders aren’t risking any personal assets should the business incur debt or be declared bankrupt (so long as no fraud has taken place). This is different from sole traders, who are legally considered the same as their company, therefore are personally liable for any business debt.

3. Boosted credibility

The letters ‘Ltd’ after a company name offer a certain assurance to customers, clients and investors. Although limited status doesn’t guarantee legitimacy, it’s generally believed that limited companies are ‘safer’ to deal with than unincorporated firms. For this reason, being a limited company can help widen your network of potential clients and open the door to trading with larger corporations.

4. Easier to raise finance

As a limited company, you may be more likely to get a loan from a bank, as some financial products are only available to small businesses with limited company status. Further, a huge benefit of registering as a limited company is that you can sell shares to raise capital. This way, shareholders can invest in the future of your company and help you grow while receiving dividends.

Seeking the advice of limited company accountants can help you make sense of the procedure of selling shares and ensure you’re abiding by current legislation.

What are the reporting requirements of a limited company?

A limited company must submit accounts to HMRC throughout its trading lifetime. These include:

First set of accounts

21 months from the date your limited company was registered (or ‘incorporated’) with Companies House, you must submit initial accounts.

Year-end accounts

At the end of each financial year, annual accounts (aka statutory accounts) must be submitted to HMRC, Companies House, shareholders and various other stakeholders. These annual accounts include a balance sheet, a profit and loss account and a director’s report.

Corporation tax

9 months after the company’ nominated accounting period for Corporation Tax ends, you must report any Corporation Tax owed and make a payment to HMRC.

Company tax return

This must be submitted 12 months after your accounting period for Corporation Tax ends.

Is a limited company the right choice for you?

If you have a business idea with a view to scaling it up in the future (such as hiring staff, expanding operations or investing in equipment), a limited company could be the way to go. This popular structure offers benefits such as limited tax liability, greater chance of raising capital and tax efficient operation.

Ultimately, it’s up to you to decide which structure best suits the needs of you and your business. Remember – an online accountant can help you in the initial stages of setting up your company, not just once you’re established and trading.

If you’re interested in learning more about our accounting services, please don’t hesitate to contact us.