What is a Limited Company

You’re planning to go into business but if you ‘re really serious about it, experts advise you to have limited ambitions... in other words, rather than becoming a partnership or a sole trader, go for becoming a limited company.

There are two basic types of company – a public limited company or plc and a privately-owned public liability company, which is the one you would most likely choose. These companies can own property, incur debt and the owners are only liable for the amount invested in the company.

The advantages of limited companies mean that they’re on the increase – over 200,000 were registered in the UK last year – many are former sole traders who have found that limited company tax rules work to their advantage.

For instance owner-managers can increase tax-deductible pension contributions when directors of a limited company. And remember that limited companies are subject to company law which makes it easier to negotiate contracts. They can often negotiate development funds more easily than partnerships or sole traders.

Financial experts point out that a limited company is a completely separate legal entity from the people who either own or run it and is responsible for its own debts.  Your personal financial risk is limited to how much you invested and any guarantees you gave. In theory, if the company goes bankrupt the maximum the shareholders are required to contribute to creditors is “the amount unpaid on their shares”, which is usually nil.

But in practice some directors do find they have financial problem when a company fails – they may be responsible for some of the firm’s tax liabilities, or may have had loans instead of wages. And if personal company loans are called in, even the homes and personal assets of directors can be at risk.

If it’s decided that the company has gone bust due to the failings of the directors you might be liable for some debts as well as being disqualified from being a director of other companies.

But if the business is sound and profitable, the security given by limited liability is generally regarded as well worth having. Alastair McFarland, who runs three Lake District specialist outdoor clothing shops changed from a partnership to a limited company last year and says he’s glad he did.

“When we were small it was advantageous from a tax point of view to remain unincorporated. Now as the business has developed and the profit increased it’s sensible to leave some of the profits in the company where they will be taxed at a lower rate.”

If you, too, decide to go along the limited company route, you’ll find the process has been considerably simplified by new legislation – you can even get a starter pack from Companies House. A popular alternative is to buy an off-the-shelf “shell company” and transfer your existing business to it in exchange for an issue of shares.

Shell companies can generally be bought through a solicitor or an accountant. The alternative is to get a company formation agent to draw up a memorandum and articles of association and register the company.

The cheapest option is dealing with Companies House. You will need a company name and UK address and a fee -£20 or £50 for same day service. If you prefer to deal with an online registration company, the standard service will be around £100 including fees. A same day online service will cost around £125.

But it’s worth remembering that being a limited company can attract more paperwork and bureaucracy.  Which is why John Davis, who runs a small Wiltshire agricultural engineering business, has gone back to being a sole trader.

“I’m happy to give up having Ltd. on the notepaper,” he says. “If it means not having to sit up half the night checking the books!”