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Advantages of a Limited Company

UK Key Points

  • Time - only 1 day to incorporate your company
  • Cost - a UK company will cost £180
  • Directors - only one director of any nationality, is necessary for your Limited company
  • Shareholders - only one shareholder of any nationality, is required
  • Share Capital - there are no minimum share capital requirements
  • Support - using our 20 years experience we guide you throughout every step of the company formation process
  • No obligation requiring UK participation in the management of your company

Limited Liability - what does it really mean?

The principal benefit of trading as a limited company has always been the limited liability of the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company.

As long as the business is operated legally and within the terms of the Companies Act, the personal assets of directors or shareholders are not at risk in the event of a winding up or receivership.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses. Also, many of the costs associated with managing and operating a limited company are not much more than with a non-limited business.

There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

Directors pay income tax and the company pays corporation tax on company profits. With the current tax rates, company profits earned and retained in the business are assessed to corporation tax at lower rates than if income tax were payable on equivalent profits earned by an unincorporated business. If a limited company becomes insolvent and is wound up, only the assets of the company are used to try to clear its debts. The officers of the company have no personal liabilities, are not made bankrupt and can freely incorporate another company. The shareholders are liable only to the extent of any unpaid shares held.

By contrast, if you trade as a sole trader, partner or partnership, your income will be taxed as proprietors' income, regardless of how much profit is retained as working capital. Interest on loans to the business is also taxed as income. Furthermore, partners are personally and jointly liable for partnership tax and if a partner dies, the surviving partners are responsible for partnership tax. Creditors can claim all your property to satisfy debts, and if this is insufficient, you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.

Maximising the Benefits of a Limited Company

Tax Benefits

  • Ensuring that your company makes pension contributions.
  • Ensuring that you claim the maximum possible expenses allowable under legislation.
  • Ensuring that capital equipment used in your business is purchased by you and that capital allowances are claimed.
  • Ensuring that benefits in kind (insurance, health care etc.) are paid out of the company, but only if your Salary and Deemed Payment are likely to be below £26,000 per year.

Other considerations are:

  • Keep cash in the business as a loan to the business, so that the company receives gross interest, and only pays 10% tax on the first £10,000 taxable profits. If you keep spare cash in an account in your name you may well pay 40% tax on the interest.
  • Ensuring that other income streams are generated by the company and that expenses are allocated to that income (i.e. Partners Salary allocated to the interest income). That way, no tax will be paid on some forms of income.
  • Make maximum use of your £7500 capital gains tax free allowance.
  • There are a number of other tax advantages for a limited company. Firstly, there is no National Insurance to pay. A limited company only pays Corporation Tax at 10% on its profits up to the level of £10,000 and 20% between £50,000 - £300,000, after deducting all expenses including directors remuneration.
  • Often it is possible to reduce the Corporation Tax, with careful planning, by making dividend payments to its shareholders, and by the use of a Company Pension Scheme.
  • The company has a legal existence separate from its management and its members (the shareholders)
  • Members have limited liability
  • The company's name is protected
  • It has flexible borrowing powers
  • The company continues despite the death, resignation or bankruptcy of management and members
  • The interests and obligations of management are defined
  • Appointment, retirement or removal of directors is straightforward
  • It is easy to procure new shareholders and investors
  • Employees can acquire shares