What is a limited company?

What is a limited company?

A limited company is a company that is limited by shares (private or public) or guarantees, i.e., it is being controlled by shareholders or guarantors. The registrar for limited companies in the UK is the Companies House.

The selling point of limited companies is that the company is a different entity from the shareholders or guarantors. In other words, unlike the sole trader or business partnership, a limited company is legally responsible for its own profits, losses, and liabilities and can sue and be sued. Since a single person can both be the director and shareholder, a limited company can be owned by a single person who is legally separate from the company.

In addition, since limited liability companies are distinctly separate from their owners, the company’s assets are owned by the company. So in case of any liability, it is only the assets owned by the company that is fair game, not those of the shareholders or owners.

As a general rule, all limited companies must have names that end with Ltd (Limited) or Cyf (Cyfyngedig, if you are registering in Wales).

Advantages of the public limited companies over private

Public limited companies are also common in the UK and are designated as PLC. Usually, when a company carries the PLC designation, it means such a company is open to public shareholders and the company is fairly large.

The advantage of a public limited company is that when a shareholder dies, the company will still function since its running was not dependent on a single person to start with. Also, a public limited company can raise capital from the public, unlike the private limited company where the capital must be from the member shareholders by private share sales. So, when a private limited company needs to raise funds from the public to avoid going under, they could be advised to take the company public.

How to register a limited liability company?

Company registration is also known as company incorporation. You can either register and submit directly online via the Companies House website, print out the form and send it via mail to the address on the form, use an agent, or a third-party website.

Here are a few things to consider and make available before registration.

• Choose a name – the name of the company you are choosing must not have been in use or be similar to that of another company or be an existing trade name, must end with Ltd, and must not contain any offensive or sensitive word.  
• Verify the name – this can be done on the website of the Companies House. Name search is free. 
• Choose the directors and or the company secretary – having one or more directors is important but a company secretary is optional.
• Choose the shareholders or guarantors – shareholders could be one or more and this same person can be a shareholder. So, it is possible to have a company that is run by a single person. 
• Choose the persons with significant control (PSC) – these are the people with voting rights in the company. The Companies House would like to know them.  
• Prepare your documents of association – these are the statement of organisation of your company, describing how your company would run, i.e., memorandum and articles of association. 
• Know the records you need to keep – some of these are the minutes of meetings and votes, as well as company and account records. These must be kept for at least 6 years after the end of the last company’s financial year 
• Register – you should keep handy your business’ SIC code, company or director’s address, and at least two personal information about your company’s guarantors or shareholders.

After successful registration, a digital certificate of incorporation will be sent to you via email. You can request hard copies which will be sent to your registered address as well.

You can also voluntarily register for VAT but it is legal to register if your taxable returns annually are more than £85,000. This could be advantageous to your company since it’ll be able to recover some funds via VAT to alleviate the impact of taxes on its finances.

Positive implications of being a limited company

Since a limited liability company is separate from its owners…

• Its finances are separate from that of its owners or shareholders. This implies that a limited company will be taxed separately, completely responsible for its profits which are used as working capital after payment of dividends to shareholders and directors, and bears any liability that may ensue. In other words, the shareholders’ or guarantors’ personal assets are protected against any liability. 
• With bigger assets, limited liability companies have better access to loans from financiers than sole traders. This is because the company’s assets are worth more and they have more credibility. 
• Various sources of capital. A private limited liability company can be taken public through an initial public offering (IPO) and thus become able to access funds from the public. Otherwise, a shareholder can also choose to sell part of his shares if there is an interested investor that can finance the company. 
• The company does not have to go under simply because a shareholder sells or transfers his share, or dies. 
• Higher tax advantage over sole proprietorship or partnership. Limited Companies generally pay less tax especially because they would have registered for VAT would be a form of a rebate.

Disadvantages of Limited Liability Companies

Despite the number of advantages that can be garnered from transitioning your business to a limited company, there are a few disadvantages

1. Elaborate accounting and tax filing– doing the account of a company may compulsorily require the expertise of an accounting firm (for large companies) or an in-house accountant. The tax filing also becomes more elaborate since the company would have several inlets and outlets to funds.
    
2. Annual account filing and confirmation statements with Companies House– unlike the sole trader, a limited company’s accounts must be accurately declared with the company registrar every year unfailingly. The annual accounts filing involves presenting your company’s balanced account records each year to the government while the confirmation statement is simply used to declare that all information presented to the Companies House is accurate. Doing this every year may be tedious. 
    
3. Companies’ information available in the public domain– the Companies House is legally required to make all information about the companies registered with it on the public registry, accessible online on their website. Hence, it is easy for competitors to get the financial details without much ado.
    
4. Higher Administrative costs– there will be the need to have executive role directors and their subordinates in limited companies, unlike the sole trader who owns and does his business alone. A limited company thus becomes costlier to run.