The most common type of limited company is the private company limited by shares, more commonly known as simply a limited or ltd company.
The main benefits of forming a limited company are:
Protect Your Business Names
Apart from getting a trade mark forming a limited company is the only way to register a business or company name in the UK. Even if you do not want to trade as a limited company it is common for people to form a company in order to register the name and then hold the company dormant to stop anyone else using it.
Get Limited Liability
A limited company is a separate legal entity from the people who set it up. You can think of it like creating a new person. Limited companies can enter into contracts, take on debts and earn profits. They can do this rather than the business owners doing it as individuals. The benefit of this is that something goes wrong it is the company that will be liable for the debt, the breach of contract or the tax on the profits. This offers you as an individual some separation and protection from the business. Ultimately it means that if the company goes bust your house and your personal bank accounts and assets should not be used to pay the company’s debts.
Clear Business Ownership and Shares
Forming a limited company gives your business a very clear legal structure. This is really useful when there are multiple people involved in founding the business or where you plan on seeking outside investment. When you form a limited company you have to allocate shares and shareholders. The percentage of shares each shareholder has decides how much of the company they own and it also decides how much a say they have in company decisions. As the business grows extra shareholders can be added and different share classes can be setup to give groups of people particular voting rights. You can also give shares away in exchange for investments or to reward employees.
You get to use the ‘Limited Title’
Many people see forming a limited company as a sign of credibility. Lots of large businesses prefer to deal with limited companies rather than with sole traders and may insist that you form a limited company before they will do business with you. In part this is because if you form a limited company they can check out your accounts more easily and they can use well established methods for chasing debts or broken contracts. This is much harder for them to do with a sole trader and it is therefore much riskier for them to deal with sole trader businesses.
Pay Less Tax– One of the big motivations for lots of people to go limited is to reduce their tax bill. As a sole trader your profits are taxed in the same way as PAYE income. So profits over £34,000 will be taxed at 40%. With a limited company you can pay yourself through loans (zero tax), dividends (10% tax) and PAYE (first £10,500 free then 20%). Using a mixture of these methods can result in a significant tax saving compared to being a sole trader so you get to keep more of the money you have earned.
We have a range of limited company formation packages ranging from free formations to premium formations with priority submission.
Alternatives to limited company formation
There are many benefits of a limited company and thousands of people form limited companies every year. Although Limited companies are a very common way to set-up a business but they are not the only way. Some of the other types of formation/business structure are:
- Sole Trader
This is the most common way to run a business in the UK. It registers you as self employed with HM Revenue & Customs rather than registering the business.
There is no specific non-profit company type in the UK but there are several types of limited company, and other structures, which can be used to run not for profit organisations. Probably the most common is a company limited by guarantee.
Often used by accountants and law firms partnerships can be good option for some organisations.
Forming a limited company is not for everyone. If your turnover is very small then the added paperwork involved in setting up a company and maintaining it may not be worth the extra expense. To discuss whether a limited company is the best structure for you please give us a call on 0800 0828 727