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).
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!
- ANONYMITY - You can appoint nominee company officers
and shareholders. No-one need ever know who is running
the company!
- Reduced tax bills - (For the fiscal year to 31st March
2004 Corporation tax on profits is 0% (zero) on first
£10,000. When net profit reaches £50,000 the
rate of tax is 20%, i.e. £10,000). If you are a
higher rate (40%) taxpayer it can be beneficial to draw
a low wage from the company so that the higher 40% rate
is avoided, leaving the balance of net profit liable for
the 20% rate. This is a common way of preserving valuable
cash resources for the business.
| Example
for tax year 2003/2004 |
| Self employed with income
of |
44,615.00 |
|
| Less personal allowance |
4,615.00 |
|
| Income before deductions |
40,000.00 |
|
| Tax & class 4 N.I. |
|
10,060.00 |
|
| Company with net profit
of |
44,615.00 |
|
| Pay director personal
allowance |
4,615.00 |
|
| Net profit to be taxed |
40,000,00 |
|
| Corporation Tax |
|
6,750.00 |
|
| SAVING |
|
£3,310.00 |
- 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, for further details on this service
go to our trademarks
page.
- 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:
- 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).
- All partners are assumed to have
authority to act as agents of the partnership and
their actions are binding on all the other partners.
- Who is in charge?
- How will assets of the business
to be held? i.e. who owns what?
- How will a partner's share in the
business be passed on? i.e. succession planning.
- How will a partner resign without
the partnership being dissolved and the business wound
up?
- 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 – This is a service we
can provide, please contact us for details.
Return to our Company Formation home page
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