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What is a Limited Company?

A company is a separate entity - a legal person in its own right, quite separate from those who own it (the shareholders) and those who run it (the directors).

what is a company?As a separate person, a company can itself:

  • own property
  • employ people
  • act as director or secretary of another company
  • enter into contracts
  • sue in the courts
  • be sued

A private company may be limited by shares or by guarantee (a commitment to contribute a given sum if the company is wound up).

The key point to recognise is that a company may have limited liability for its shareholders. The effect of this is:

  • If the company is unable to pay its debts and is put into liquidation, the members will not be required to contribute more than they have actually paid or agreed to pay towards settling its debts. This amount is usually determined by the value of the shares held, e.g. If a company has issued 100 ordinary shares of £1 each and they are fully paid, the shareholders will NOT have to pay any more.

Some advantages of trading as a limited company are:

  • Risk avoidance - ESPECIALLY EMPLOYMENT LEGISLATION WEIGHTED IN FAVOUR OF EMPLOYEES. Because of the limited liability of the company, risks that would normally be the responsibility of partners and sole traders become the responsibility of the company. Industrial tribunals are awarding up £50,000 to employees for compensation claims!
  • Image - Operating your business as a company may appear more professional to customers and suppliers
  • Reduced tax bills - Depending on your income you can save thousands by distributing profit by dividend
  • Tax Free Mileage. For business purposes the car mileage rate is 40p on the first 10,000 miles (£4000 per annum).
    Protection of name (Companies House will not register another name that is the same). Also if another name is registered and it is considered to be 'too like' another existing company the latter can lodge an objection with Companies House who can direct the new company to change its name. You may also want to consider UK Trademark protection of your company name.
  • Problems of partnership are avoided – If a partnership deed is not agreed at the outset the statutory rules of the Partnership Act 1890 apply and problems may arise in the following areas:
    1. Partnerships have unlimited liability and so all partners are fully liable for debts of the business that may have been incurred by other irresponsible partners (this is called joint and several liability).
    2. All partners are assumed to have authority to act as agents of the partnership and their actions are binding on all the other partners.
    3. Who is in charge?
    4. How will assets of the business to be held? i.e. who owns what?
    5. How will a partner's share in the business be passed on? i.e. succession planning.
    6. How will a partner resign without the partnership being dissolved and the business wound up?
    7. If partners are related have potential estate duty and capital gains tax liabilities been dealt with?
  • More credibility in the market place.
  • Raising capital - easier to raise loans for the business, etc.
  • Succession Planning - Some of the problems of how a business is left to heirs can be solved. You should seek professional advice about this.

Some disadvantages could be:

  • Ownership of assets can be locked up in the company. However steps can be taken to mitigate this effect. e.g. directors owning property and leasing to the company.
  • PAYE has to be operated – Accountants and Payroll Specialists can do this for you, in exchange for a fee.
  • Accounts need to be filed at Companies House. We recommend seeking the assistance of a local small to medium size accountant for assistance with filing documents.

Return to our Company Formation home page

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