We’ve all heard the term ‘limited company’ thrown around in conversation, but do you actually know what it means? From a legal perspective, incorporating as a limited company comes with many benefits – some which may be more obvious than others. In this quick and simple guide, we walk you through what a limited company is and the key advantages of setting up as one in the U.K.
What is a Limited Company?
Before we take a look at the advantages of incorporating a limited company in the U.K., we need to understand exactly what a limited company is.
A limited company is a company ‘limited by shares’ or ‘limited by guarantee’. A limited company has separate legal personality, which means it can contract in its own right and has its own rights and legal obligations. The liability of the company, does not ordinarily extend to the founders of that company.
Businesses often incorporate as a company limited by shares with a view of making a profit and they:
1. Have a separate legal personality to those who run it
In other words, the people who run the business are not personally liable for any legal or financial issues arising in the course of business.
2. Have separate finances from those who run the business
3. Have shares and shareholders to any other company
4. Can keep any profits after tax within the company, which is can then invest into the business or pay out to its shareholders as a dividend
Companies limited by guarantee often tend to be ‘not-for-profit’ (and often registered as charities) and they:
1. Have a separate legal personality from those who run it (as above)
2. Have separate finances from those who run the business
3. Have members and a ‘guaranteed amount’ which the members will agree to be liable for to the company (for example, £1), which is the extent of their liability to the company
4. Invest income back into the business or charity (if it is registered as one)
How do I register as a Limited Company?
First, you need to check that incorporating a limited company is the best option for you. There are various different types of business structure that have varying benefits and implications depending on your specific business and circumstances. It’s worth noting that your choice of business structure will have tax and financial implications, so it’s not a decision to be taken lightly. To find out more about all the different types of businesses, check out our guide.
Once you’ve settled on incorporating a limited company, you will need to:
- Select a name for your business (which has not be registered already and which is permissible and does not infringe on the rights of others)
- Appoint directors and, if you wish, a company secretary
- Decide who your shareholders or members will be
- Prepare relevant documents that state how your company will be run
- Check your administrative responsibilities
Then you will be able to register your company with Companies House.
Advantages of Setting Up a Limited Company in the UK
Now that we’ve understood the context and processes involved, let’s take a look at the benefits of setting up a limited company in the U.K.
1. It’s easy & straightforward
One of the biggest benefits of incorporating as a limited company is that it’s a relatively straightforward process that comes with lots of advantages. This is perhaps one of the most compelling reasons for opting to register as a limited company. It is also intended to be that way, in order to encourage entrepreneurship.
2. Company has its own legal personality
When you incorporate as a limited company, your business gains its own legal personality. This means that, for example, your company will be able to enter contracts with third parties. In addition, as we mention next, this limits the personal liability of those responsible for running the company and its founders.
3. Limited personal liability
One of the biggest benefits of incorporating a limited company in the U.K. is the limited personal liability of the people running the business. This means that even if your business faces financial or legal trouble, the personal assets of those responsible for the business will be afforded protection, so long that the directors have acted properly in running the company. This is because, as we mentioned earlier, a limited company is its own separate legal entity.
4. Potential tax advantages
Depending on your circumstances, more often than not, registering as a limited company can have tax benefits. Limited companies pay corporation tax rather than income tax. This means you’ve got more options and flexibility when it comes to planning for tax.
5. Ability to issue shares to raise capital
As a limited company you’ll have more options when it comes to raising capital for your business. This is because you can sell shares to new investors. Plus, registering as a limited business will also open up access to some loans reserved for incorporated businesses. It can also be an exit strategy for the founders of a business which has been incorporated.
6. Strengthened credibility and reputation as a business
Even if there’s no actual difference between how your business runs, registering as a limited company is a great way to reinforce your business’ credibility and reputation. Probably the biggest reason for this difference in perception is that limited businesses are under more scrutiny than sole traders, for example. This is because of the requirement to adhere to more administrative procedures.
7. Benefits to pensions
Incorporating as a limited company gives you the option to put pre-tax income into a company pension scheme, should you want to.
FAQs about Limited Companies
1. Is it worth setting up a limited company UK?
This depends on your individual circumstances and what your business looks like. If the benefits listed above make sense to you and your business, then it may be worth setting up a limited company in the U.K.
2. What are the benefits of a limited company UK?
As we’ve seen, there are various benefits associated with limited companies in the U.K. Of particular note are the limited personal liability as well as differences in tax.
3. Can anyone set up a limited company UK?
Pretty much anyone can set up a limited company in the U.K. However, you must be a minimum of 16 years old, you cannot have previously been disqualified as a director, and you can’t be an undischarged bankrupt.
4. What are the disadvantages of a limited company?
Registering as a limited company comes with some added administrative responsibilities, and your accounting needs are likely to increase. This may mean some increased costs.
If you’re looking to incorporate as a business, a limited company could be the way to go. With all the associated benefits we’ve looked at, it’s an appealing option. As we mentioned, though, your choice of business structure can have implications on your tax and financial situation, so it’s advisable to seek professional guidance when making this kind of decision.
Whether you’ve made up your mind and need help incorporating your company or would like another opinion, our first-class business lawyers are on hand to help. With at least five years industry-experience, our team of lawyers bring the expertise needed to guide you through the process swiftly and smoothly. Get in touch today to get started.
Read more in detail about setting up a company in the UK