What Is a Limited Company? A Simple Explanation
A limited company is a business structure that has its own legal identity. It is separate from its owners (shareholders) and managers (directors). The company provides the significant benefit of limited liability. Therefore, if the company faces debt or a court decision, the law exempts a shareholder’s personal belongings. He is accountable only for the sum he has invested in that company. This structure reduces the risk for the entrepreneur personally.
Companies, particularly limited ones, must follow legal rules. People register them with offices like Companies House for those in the UK. There are two main categories: private limited companies (Ltd), owned by a limited number of people, and public limited companies (PLC), whose shares trade publicly.
Some key features of this company are:
- Separate Legal Entity:
Company is not the owner. It is a separate legal body from the owners.
- Limited Liability:
The liability of the owners is restricted to their investment.
- Shareholders and Dividends:
Shareholders hold shares in the company. They directly collect dividends, which are divided in proportion to their shareholdings.
- Directors:
People entrusted with running the business have a responsibility to keep the business within the bounds of law.
- Taxation:
The limited company also pays corporate taxes, distinct from those of the shareholders, though often considerably lower than their rates, as well.
This structure offers protection and credibility, making it a popular choice for businesses.
Types of Limited Companies: Which One Is Right for You?
You can register as a Private Limited Company (Ltd), or in some circumstances, a Public Limited Company (PLC).
A Private Limited Company (Ltd) is the preferred structure of small to medium enterprises. Its shareholding is private, not available for trading on the public exchange. The benefits include limited liability. In case the organisation faces debts, the personal assets of the shareholders will not be lost. Furthermore, an Ltd company has simpler management and has fewer reporting requirements compared to other company types.
On the other hand, Public Limited Company (PLC) allows companies to issue shares to the public. Hence it is most suitable for large businesses with the aim of raising a large amount of capital. Still, PLCs are strictly regulated, have more administrative costs, and detailed financial reporting.
It is actually on whether to have an Ltd or a PLC, depending on its size, required capital, and control of the business. The better option would be the Ltd for smaller businesses, while the PLC is more recommended to bigger companies desiring public investment.
The Benefits of Forming a Limited Company
The following are the benefits of setting up a limited company. These make the business operation more attractive than a sole trader or a partnership, respectively. The main benefit here is that limited liability protects shareholders’ personal assets. If the company fails, they only lose the capital invested, while their personal funds stay safe from creditors.
Another potential benefit is tax efficiency. A limited company pays most profits at lower tax rates. Directors pay themselves through salaries and dividends while naturally keeping personal taxation liabilities lower. A limited company’s business structure boosts its credibility, attracting clients, investors, and partners more easily due to its stability and trustworthiness compared to other business types.
These are a few of the basic advantages,
- Limited Liability Protection:
Shareholders are not liable to the losses in case of going bankrupt financially.
- Tax Efficiency:
The corporations tend to pay lesser corporate taxes and can benefit in any form of dividend payments.
- Professional Image:
Being a company might help improve the business reputation and attract additional clients or investors.
- Ease of Raising Capital:
Companies that are limited can issue shares for raising capital for more expansion.
- Separate Legal Entity:
This is a separate legal entity, making contractual arrangements and passing the ownership much easier.
Steps to Setting Up a Limited Company
There are advantages of forming a limited company, including limited liability and tax benefits. But what is crucial is the question of which correct process to undertake in order to be legally compliant and for future growth. The following would describe how to set up a limited company.
Choose a Company Name:
You will need to select a unique name that fits the local regulations.
Appoint Directors and Shareholders:
You will need at least one director and one shareholder-the same person.
Prepare Key Documents:
Articles of Association: These are the rules for how the company operates. Memorandum of Association: This document confirms the intent to form the company.
Register with the Relevant Authority
Now that you have all your documents, it is the time to submit all the information for registering the company at the appropriate government agency. You may need to contact ‘Companies House’ in the UK for this.
Registered Office Address
You need to have a physical address for receiving legal correspondence.
Issue Shares:
Decide on the number of shares and allocate to the shareholders.
Pay Registration Fees:
This varies; in the UK, for example, one can register his business online free from a low fee.
Register for Taxes:
Corporation tax, value-added tax, and payroll tax if applicable.
Open a Business Bank Account:
Keep money separate from personal accounts.
This is how you run an operation like this for establishing a limited company promptly and properly and legally.
Understanding the Role of Directors in a Limited Company
The directors of a limited company manage the business of the company and take decisions with strategic input in consonance with the set objectives of the company. Some of the very significant responsibilities of a director are summarized below:
- Legal Duties:
Directors have an overriding interest in the company and its shareholders.
- Fiduciary Duties:
They must make honest and good-faith decision in matters related to the company.
- Compliance:
Directors must ensure the company complies with the law, file various returns, and keep the books of accounts in proper order.
- Key Strategic and Operational Decision Making:
The directors are supposed to be involved in the key decisions that influence the operations and strategy of the company.
- Delegation:
The directors are held accountable even in a case where they have delegated their roles.
- Non-Conflicting Interest:
The director should not have any personal interest that might conflict with the duties of the company.
- Solvency:
Ensures the solvency of the company and does not engage in wrongful trading
- Shareholder Engagement:
Should keep the shareholders informed of any possible changes and seek shareholders’ approval prior to basic changes affected
Thus, this job makes the director responsible in the sense that he is accountable for both law and success of the company.
The Tax Obligations of a Limited Company
Running a business with a small company dictates knowledge about major tax obligations. The most important among them include:
First we need to mention company tax. Here, the company pays its tax on its profits, usually at 19% or more, following the UK rate. There also has to be a yearly corporation tax return.
PAYE and NICs For employees, the employer should recover income tax and National Insurance under PAYE.
Dividends Tax Shareholders’ Dividends are treated as profits and will be charged on dividends drawn out over and above the annual exemption.
Business Rates If businesses operate from business premises then they may incur business rates.
Company Tax Returns These companies must lodge annual tax returns and accounts for updates directly with HMRC and Companies House.
Some of the key taxes on which the limited company has obligations are discussed as follows.
Why Limited Companies Are a Popular Choice for Startups?
All this adds up to put the top most on to wish lists of new startups. The key advantages of the same include an assurance of limited liability, whereby the personal assets of founders remain protected and safe from risks.
Issuance of shares to raise funds to attract investors makes the process of raising capitals less cumbersome too. Tax efficiency is given by a limited company since corporate tax rates are much lower and dividends can be paid against tax liabilities.
It projects a professional image which lends creditability to clients and investors. For startups, it is advisable to limit companies so that they can grow and seek funding.
Owners’ liability is only up to the amount of capital they have introduced. In case the business goes bad, creditors would be able to claim only business assets, and not personal ones.
Companies can have an advantage in terms of owner’s personal assets that provide a separate legal personality, superior supply of finance, and tax effectiveness.
Company House demands both ‘Limited’ and ‘LTD’; the choice between them is a matter of aesthetics.
Most limited companies are shareholder owned. Shareholders have rights, such as having voting rights on the company’s decisions.
For a limited company provides legal identity and, hence, protection, easy access to loans and investments, and tax benefits.
Conclusion
In short, limited companies are ideal for startups in that there is liability protection for owners, easier access to funding, tax efficiency, and credibility. All these points make them one of the best for growing businesses while protecting personal assets.
If you’re interested in starting a limited company, contact us today to explore your options! You can also check out our off the shelf companies for a quick and hassle-free setup.
