Various characteristics define what a limited company is, but all in all, there is one that describes it better than the rest. Limited companies are businesses in which, in case the company goes bankrupt, the owners (or shareholders) of the company partially pay for the money they owe. This means that the company is legally separated from those who are in charge of it.
On the contrary, an unlimited company requires its shareholders to use their own money to compensate for any debt. Therefore, they are responsible for the creditors’ refund.
Needles to say, there is more to know to fully understand what makes a business a limited company. In this article, we’ll share 6 things you need to know.
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1. Main Advantages
The advantages of a limited company are many. However, there is one that stands out the most: it works as a separate legal entity. As such, you don’t run the risk of losing your capital in case the company fails financially. In other words, every legal claim is the company’s responsibility, not yours, because the company is treated as “another person”. Worst case scenario, you must pay the nominal value of your shares. The rest is up to the company.
As a consequence, this leads to another advantage: reliability. When handling contracts with a high level of risks, such as IT projects or finance-related deals, your clients will want legal security above all costs. After all, there is too much to lose in case a legal issue emerges. In simple terms, a limited company provides credibility because it also provides protection.
Naturally, an overall better reputation leads to yet more advantages, such as attracting a bigger amount of potential clients or expanding your company to other markets.
2. Main Disadvantages
There are always two sides to a coin, which means that a limited company has setbacks of its own. However, these have to do more with limitations and obligations, rather than disadvantages per se.
For example, every limited company must be incorporated at Companies House (UK), which involves paying an incorporation bill. Additionally, a person who is an undischarged bankrupt is not allowed to establish a limited company, which makes it a clear limitation. Lastly, every company must comply with the record-keeping requirements, which include records about the company, and accounting and financial records. These records are not private. They are available for public inspection, which for some, may also be considered a disadvantage of setting up a limited company.
In the end, the biggest disadvantage of setting up these types of companies is the extra work that keeping all the records demands. It is time-consuming, but worth it in the long run.
3. Registered Office Address
A limited company has its address, which is formally known as the “registered office address.” Although this address needs to be a real location, it doesn’t have to be the place where the company executes its business.
In the UK, a registered office address is required so the Companies House can send important documents to the company. This means that the company address won’t be private since it will be available on the Companies House website. Therefore, for anyone planning on setting up a UK company, the registered office address is one of the most relevant steps to take care of. Virtual addresses also provide a physical location for home and online companies.
4. Private vs. Public
The limited companies are divided into two main different types. The first one is the Private Limited Company, the most common (and most favorable) setup in the UK for small businesses. It is divided into other two categories which we’ll define below. On the whole, the shares of the Private Limited Companies cannot be offered for sale to the general public.
The second type is the Public Limited Company, also known as PLC. In these types of companies, the shares can be offered for sale to the general public in the stock market, which of course, helps to raise capital. Nonetheless, the PLCs must have issued shares at a value of £50,000 minimum. All in all, the second type is more profitable for long-established businesses.
5. By Shares vs. By Guarantee
We mentioned that Private limited companies are divided into two categories. They can be either private and limited by shares, or private and limited by guarantee.
The private and limited by shares companies are most likely chosen by freelancers setting up a company. In this case, the private company is divided into shares, which are assigned to shareholders with an equal financial value on each share. In other words, the liability of the shareholders to creditors of a company is restricted to the number of funds invested initially.
On the other hand, private and limited by guarantee companies are the ones owned by guarantors, not shareholders. These companies reinvest their earnings in the institution, so they can use it for a variety of motives. It is generally used by non-profit associations.
6. Types of Taxes
All companies must pay taxes, including limited companies. However, they don’t pay income tax as other companies do. Instead, they pay some specific types of taxes.
For example, limited companies pay the corporation tax on business profits, with a current rate of 19 percent. Simply put, charges won’t increase according to the company’s earnings.
The next one is the “Value Added Tax”, also known as VAT. It applies to businesses involved in the production and distribution of goods and services. It’s worth noticing that not every limited company must pay this tax.
The last biggest tax is the National Insurance payments. If you’re an employer, you must pay National Insurance contributions on the earnings of your employees, and collect their Class 1 National Insurance contributions through the PAYE.
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Funding a limited company is the safest form of avoiding potential financial risks. Since the company’s debts are strictly isolated from your private earnings, you won’t suffer from any legal issues that may emerge. Before starting your business, you must make sure you understand both its advantages and setbacks. Ask for professional guidance whenever in doubt. If you set up a limited company the right way, the benefits will be long-term.
