What is a limited company? I get asked a lot of questions about limited companies, so here is some information on what a limited company is to help you to get an idea of whether this would be right for you and your business.
A limited company:
- Is registered with Companies House
- Has to comply with the Companies Act 1996
- Has certain information (including financial) publicly available
- Is its own legal entity – if you own a limited company, then legally you are separate from it
- Will have certain documents, including Articles of Association
- Must have at least one director
- Will be owned by shareholders (unless the company is limited by guarantee)
- Shareholders and directors are not liable for the company’s debts unless they have done something dishonest
I blogged about directors responsibilities a couple of weeks ago. Running a limited company brings various responsibilities with it. You have to understand what those are, and what the consequences could be if you don’t meet them.
So what are the benefits of operating through a limited company, instead of as a sole trader?
- Limited liability (mentioned above) assuming no wrong-doing
- Easier to share ownership among several people – and you could even issue shares to key employees to encourage loyalty to your company
- May present a more permanent and reliable appearance which could help with getting contracts with certain companies or government departments
- Limited companies can be more tax efficient – i.e. you could save tax as a limited company
In brief, there are a lot of advantages to operating as a limited company, but it very definitely isn’t right for everybody. There is a lot more admin involved – including filing annual statutory accounts with Companies House, an annual return, and completing corporation tax returns – and the directors responsibilities are often under estimated.
If you are not sure that a limited company is right for you, then start off as a sole trader – you can always change to a limited company later on (and there can be tax advantages to doing so!)