What does it mean to be a limited liability company ?

Updated: Nov 25, 2021

You want to start your own business from scratch, but you have no idea where to start from? When choosing a structure for your business you may have come across the words “private limited liability company” but you do not know what it means. If so, then look no further as this article will cover this and more




1. What does it mean to be a limited liability company?

2. Can you set up a private limited liability company with one person?

3. What are the pros and cons of a private limited liability company?



What does it mean to be a limited liability company?


When choosing a legal structure for your business one of the most important things that you should consider is reducing your personal exposure to financial risk. Therefore if your business is sued or your business goes bust, the amount of money for which you are liable will be limited by the business structure that you have chosen.


The most common forms of limited liability companies in the United Kingdom are the private limited company, the public limited company and the limited liability partnership.

A limited company is a legal structure that limits the liability of the business owners to the face value of the shares that they own in the business.


Limited liability is a form of legal protection for shareholders and business owners that prevents them from being personally liable for the company’s debts or financial losses.

If you set up as a limited liability company the company is a separate legal entity with finances that are separate from those of its owners. Therefore, if the company experiences financial distress your personal assets will not be at risk of seizure by creditors.


Can you set up a private limited liability company (LTD) with one person?


The most popular form of limited liability legal structure in the United Kingdom is the private limited company.


In the UK you can set up a limited liability company (LTD) with one member. The application form requires you to list a minimum of one director and one member (shareholder or guarantor). It is uncommon for the same person to be listed in both positions.


Anyone can set up a limited company (LTD) in the United Kingdom if they are 16-year-old and they have not been disqualified director or an undischarged bankrupt.


In addition to naming at least one director and one member it is a requirement that all limited companies (LTD) provide a registered office address at the point if incorporation. It will then become the official address of your new company and it must be in the same area in which you are choosing to incorporate.


To set up your limited company you need to register it with Companies House.


Your application will require:

  • A name for the company

  • A registered office address

  • Details of the nature of your proposed business activities (you need to provide a standard industrial classification of economic activities (SIC) code to identify what your company does

  • Details of directors, including service addresses (it can be just you)

  • Details of the persons with significant control (PSC) (it can be just you)

It costs £12 to incorporate a company online via Companies House and will take about 24 hrs for the process to be completed via Companies House. You can also incorporate a company by post for a fee of £40.The time limit for incorporating a company by post is usually 8-10 days. It is therefore quicker and more cost-effective to incorporate a company online.


What are the Pros and Cons of a limited company (LTD)?


Pros:

  • You could end up paying less tax: Limited companies (LTD) pay corporation tax at 19% on their profits which is lower than income tax that others such as sole traders pay.

  • You could claim more tax relief on expenses: When you register as a limited company (LTD), you are entitled to more tax relief on some costs. For example, a limited company can claim relevant food and drink expenses as a business cost.

  • It might be easier to attract investment by issuing shares in the company. If you are looking to secure some investment in your business incorporation it could be a path for you. As a limited company you will be able to sell shares in your business. This is a good way of raising capital.

  • Your personal assets are protected as the company will be a separate legal entity from you. Therefore, if the company were sued, your personal possessions could not be seized to pay the company’s debts.

  • The company can be sold.

  • The company can retain its profits into future tax years.


Cons:

  • You will encounter more financial administrative work. Limited companies need to file accounts, a confirmation statement and corporation tax returns. Each director also has to file their own self- assessment tax return, too.

  • You will face complex taxation rules and will need to work out how to take an income from the company. Directors of Limited companies (LTD) cannot draw money freely out of the business bank account. When a limited company (LTD) make a loss it can only use that loss against its own profits.

  • Directors of limited companies (LTD) have certain legal obligations. As well as safeguarding the companies’ assets it would fall on you to make decisions to cease trading if you knew the company could not survive. If you fail to meet any of these responsibilities you could be fined or even sent to prison.

  • You will have less privacy than a sole trader as some parts of the company’s accounts will be made public on Companies House and are available to anyone to view. So, your accounts will be visible to the public, along with your companies registered address.

  • The company cannot issue (i.e trade) shares to the general public unlike a Public limited company.

  • You may have reduced control over your business if you have more than one shareholder in your company as the other shareholder(s) may dispute your decisions.


How can Pure Business Law help?


We are specialist business, commercial and corporate law Solicitors based in Bedford and London and operating nationally. We act for SMEs, individuals, charities, and non-profit organisations throughout the United Kingdom and abroad if required.


If you would like to discuss anything raised in this article or require advice on any business, commercial or corporate law matter please contact us and speak with one of our solicitors. Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.



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