If you set up your company as a limited company it will become a legal body in it's own right under the Companies Act 1985 (amended 1989). There are two main types of limited company:
To set up a limited company a management structure needs to be put in place. There needs to be at least one shareholder, at least one director ( a public company must have at least two directors ), and at least one company secretary. The director and the company secretary must be two different people. For more information on the procedure of registering your company, contact Companies House in Cardiff or visit their website at www.companieshouse.gov.uk. There will be a registration fee and a fee each year to file your company's annual accounts. It is also wise to seek advice from a solicitor.
Advantages of being a limited company
1- Better access to outside finance, e.g. by issuing shares.
2- Being a limited company means that you as an individual have limited liability. This means that you as members of the company, are only liable financially to the value of the shares that you have invested in the company if the company incurs debts. The company on the other hand is deemed a legal body by the Companies act and is viewed as unlimited. If the company fails and incurs debts then the company must pay the debts if funds are available. Even if the company is wound up, the members only have to pay the full value of their shares initially invested and any premium that may be due on them, they cannot be asked to pay anymore even if the company does not have enough funds to cover the debts.
3- As the company has a legal identity of it's own it can continue trading even after the resignation/death of a member, therefore company members can change.
4- If you are expecting large profits from your business, being a limited company may provide more advantageous tax treatment. Tax for Ltd Companies
5- The Companies Act provides a standard and convenient management structure for you to follow.
Disadvantages of being a limited company
1-The legal requirements which have to be met before you can operate the business are quite complex and lengthy.
2- The company cannot make contracts, e.g. take an order for goods or services, until it has been incorporated, i.e. the date on the certificate of incorporation of your company if the registrar of companies passes your application.
3- Annual accounts must be audited by Companies House. This could be costly and time consuming to prepare. The public would also have access to your financial statements.
Other Types of Company
Unlimited Company: It is possible to register your company with Companies House as unlimited even though this makes members of the company completely liable for any debts not the company. This type of company is rare and is only advantageous under certain circumstances.
1-Unlike a partnership, there will be a separate legal body that exists for making contracts and holding property, this will allow changes in company members if there is a resignation or death without dissolving the company.
2- There is no need to file accounts with the registrar at Companies House as members are liable for company funds and debts and so there is no need for the public to have access to financial statements.
However there is still the need to prepare and submit the required paperwork to Companies House. The only difference is the clause of liability in the Memorandum of Association is removed thus making it an unlimited company. This means that the risk of unlimited liability is also present for members. If you have shares in the company and it is wound up you must pay for the value of your shares any premiums on them and any company debts not met by the company itself. More information is available from the Companies House website. www.companieshouse.gov.uk
Public Companies - plc's
The Companies Act 1985 defines a public company as:
1- Limited by shares.
2- Its Memorandum of Association states that it is a public company.
3- A minimum of two members are required to form the company, i.e. two directors.
4- There is a required amount of share capital that needs to be invested in the company before it will be issued with its certificate *S117* from Companies House.
5- Trading or borrowing as a plc without certificate *S117* is a criminal offense.
Summary
Taxation and limited liability are the main benefits of setting up as a Limited Company.
| 1- Generally corporation tax is less for a limited company than income tax for a sole trader or a partnership. |
| 2- As the salary of the director does not have to be fixed until the results of the years trading are known you can choose how to be paid to minimise tax, i.e. a mixture of salary, pension and dividends. |
| 3- The limited company offers you protection as you have limited liability for debts should the business fail. |