Limited Company Information

In terms of legal structures, private limited companies are by far the most popular. During the financial year 2003/2004 nearly 400,000 companies were incorporated. This took the number of companies on the register towards 2 million. It is likely that this figure will soon be reached.

What is a limited company?

A limited company is a separate legal entity - a legal person in its own right, quite separate from the shareholders who own it and the directors who run it. As a separate person, a company can itself:

- own property
- employ people
- act as director or secretary of another company
- enter into contracts
- sue in the courts
- be sued

The key point to recognise is that a limited company has limited liability for its shareholders and the effect of this is that the members will not be required to contribute more than they have actually paid or agreed to pay towards settling its debts. This amount is usually determined by the value of the shares held, e.g. If a company has issued 100 ordinary shares of £1 each and they are fully paid, the shareholders will NOT have to pay any more.

The advantages of having a limited company

1) Risk avoidance by limiting liability. Risks that would normally be the responsibility of partners and sole traders become the responsibility of the company. This is particularly important in today’s ‘blame and claim’ culture and with increasing industrial tribunal claims by employees.

2) Protection of name (Companies House will not register another name that is the same). Also if another name is registered and it is considered to be 'too like' another existing company the latter can lodge an objection with Companies House who can direct the new company to change its name.

3) Many of the problems of partnership are avoided such as defining who is in charge, who owns the business (the shareholders), resignation of partner, etc.

4) More credibility in the market place. Many organisations and public bodies will not conduct business with sole traders.

5) Raising capital - easier to raise loans for the business, etc.

6) Reduced tax bills - (For the fiscal year to 31st March 2005 Corporation tax on profits is 0% (zero) on first £10,000. When net profit reaches £50,000 the rate of tax is 20%, i.e. £10,000). If you are a higher rate (40%) taxpayer it can be beneficial to draw a low wage from the company so that the higher 40% rate is avoided, leaving the balance of net profit liable for the 20% rate. This is a common way of preserving valuable cash resources for the business.

Some disadvantages could be:

1) Ownership of assets can be locked up in the company. However steps can be taken to mitigate this effect. e.g. directors owning property and leasing to the company.
2) PAYE has to be operated.
3) Details of the company's accounts, officers and shareholders must be recorded at Companies House. Although this removes privacy it does make the company much more transparent which will aid your clients in assessing the identity suitability of dealing with your company.
4) Winding up an unsuccessful business is more complicated for registered companies than sole trader businesses.