An introduction to companies limited by shares
- What is private limited company?
- Who owns limited by shares companies?
- Who manages limited by shares company?
- The purpose of shares
- Limited by shares or limited by guarantee?
- Limited company or limited liability partnership?
- Limited company or limited liability partnership?
- Pros and cons of limited by shares company formation
- How do I register a company limited by shares?
- Legal requirements for company formation
- Post-incorporation requirements
- Private limited company (LTD) equivalents in other countries
What is private limited company?
A private company limited by shares is a type of business structure that has to be set up through Companies House - the official registrar of companies in the United Kingdom. The process of legally registering a company is often referred to as ‘incorporation’ or ‘company formation’.
When a business is incorporated as a limited by shares company, it becomes a distinct legal entity - an ‘individual’ in its own right. This means that all business assets, profits and liabilities belong to the company; therefore, shareholders are not wholly responsible for the company's debts.
The personal assets and finances of the shareholders (i.e. the company owners) are protected by limited liability. This means their financial obligation to the company is limited to what they have invested in the business through the purchase of shares. Shareholders have no legal responsibility for the debts of the business above and beyond what they pay for their shares.
This type of limited company is suitable for anyone who wishes to sell goods and services as a means of generating personal income. As a business owner, a company limited by shares will provide you with financial protection and a tax-efficient alternative to the sole trader structure.
Who owns limited by shares companies?
The owners of companies limited by shares are called ‘shareholders’. Private limited companies can be owned by one shareholder or many shareholders. So you can set up a company on your own, or you can set up a company with other people.
To become a shareholder, you must purchase one or more shares that have been issued by the company. Shares are issued during the company formation process. More shares can also be created and issued after incorporation. Each share represents a percentage of the business. If you buy more shares, you own a bigger percentage of the company.
Who manages limited by shares company?
Limited companies are managed by directors, who are also referred to as ‘officers’. A company must have at least one director. In most cases, company owners are also directors. This means you can own and manage a company by yourself (if you are the only shareholder), or with other people (if your company has more than one shareholder).
You may also appoint a company secretary, but you are not legally required to have one. The law only requires public limited companies (PLCs) to appoint a secretary. A company secretary is someone who helps the director carry out his or her administrative and managerial responsibilities. As with directors, company secretaries are also referred to as ‘officers’.
The purpose of shares
During the incorporation process, you must issue one or more shares in your company. Each shareholder is legally required to take at least one share. A share is simply a piece of the company; therefore, each issued share represents a percentage of the business. These shares will determine how much of the company belongs to each shareholder.
Shares are normally issued with a nominal value of £1 each. This sum represents the liability of each shareholder. The nominal value of each share is payable by the shareholder when the company is registered, or at a later date upon the request of the company.
If you plan to register a company on your own, you can issue just one share and own the whole company yourself, or you can issue lots of shares and sell some of them to other people in exchange for investment.
Limited by shares or limited by guarantee?
Limited by shares is best if you want to set up a business to make a profit and use this money as personal income. Limited by guarantee companies are normally used by organisations that operate for non-profit or charitable purposes. People typically do not set up a limited by guarantee company as a way to generate personal income, because a limited by shares company is more suitable for this purpose.
Limited company or limited liability partnership?
A private limited company is ideal for anyone who wants to set up a for-profit business on their own or with other people, or for sole traders who want to enjoy the benefits of limited liability and manage their business finances more tax-efficiently. This type of structure is also well-suited to businesses that plan to employ lots of people other than the company owners.
An LLP is an ideal structure for groups of two or more people who want to set up professional services firms, such as accountants and solicitors. People who work in these types of professions would normally operate as a partnership; therefore, the LLP structure enables them to combine the flexibility of a partnership with the financial protection of limited liability.
Pros and cons of limited by shares company formation
This is the most significant benefit of setting up a company limited by shares - company owners are not legally obligated to pay their company’s debts above and beyond the value of their shares.
In contrast, a sole trader has unlimited liability for business debts because there is no legal separation between the individual and the business. This means the sole trader is wholly and personally responsible for all business liabilities.
Limited companies have to keep more paperwork than their sole trader counterparts, but an accountant can help with such matters.
Professional status and credibility
Limited companies are typically held in higher regard than unincorporated businesses for a number of reasons:
Limited companies have to provide more information than sole traders about their owners, directors, business activities and finances. The public has full access to this information.
HMRC and members of the public are also allowed to inspect a company's statutory records.
Increased personal income
A limited company can be a very tax-efficient way to pay yourself:
A sole trader's profits are subject to 20-45% Income Tax, as well as National Insurance Contributions.
Set-up and maintenance costs
You will have to pay an incorporation fee to register a limited company, but it is very affordable.
Certain changes and filings are chargeable: for example, you will have pay a fee to submit annual returns, and if you want to change your company name.
You may have to appoint an accountant to deal with your bookkeeping and accounting obligations; however, these costs can be offset against your increased tax-savings.
If you fail to maintain your limited company’s statutory obligations, you may have to pay a significant fine.
A limited company will enable you to defer income from one tax year to another by leaving money in the business and removing it at a later date. This will be beneficial if your business income is higher in one tax year and likely to take you into a higher Income Tax band by removing it.
This is not possible as a sole trader.
Limited companies have to maintain a number of important reporting obligations:
Many larger businesses will only work with other businesses that have limited liability.
You will be more likely to attract overseas clients, rather than just local customers.
High-value contracts will be more attainable if you operate as a limited company, because your business will be viewed as more reliable and financially secure.
More administration and paperwork is required to remove money from a limited company than from a sole trader business. This is because ltd companies are legally separate from their owners.
This means you cannot just treat your company’s money as personal income until the company has legally transferred the funds to you as a salary or as dividends.
Protected company name
As soon as your company is incorporated, no one else is legally permitted to use your company name, nor can they use any name that is considered very similar.
You will have to register your limited company for PAYE in order to receive a director’s salary.
It is often easier to obtain funding and investment as a limited company than as a sole trader.
You can also sell shares in your company if you need capital to grow your business. The liability of your investors is limited; therefore, they are protected if anything goes wrong. This is not the case when investing in a sole trader business.
If you want to close a sole trader business, you just have to stop trading and then file your last Self-Assessment tax return as usual.
In order to close a limited company, a complex dissolution procedure is required, and it will take 3 months to complete. However, you can simply cease trading and register your company as dormant if you do not wish to dissolve it.
How do I register a company limited by shares?
Limited companies can be registered with Companies House online or by post. Most people set up limited companies online through a company formation agent, because it is the quickest, easiest and most cost-efficient method of incorporation. You don’t need to fill out any paperwork, and the process is usually finalised in about 3 hours - simply enter your company details online and submit your application to Companies House. When your registration has been approved, your company is ready to go.
Legal requirements for company formation
- Incorporated with Companies House under the Companies Act 2006
- Incorporated in one UK jurisdiction only - England and Wales, Wales, Scotland or Northern Ireland
- Registered with a unique company name that ends with ‘Limited’ or ‘Ltd’
- A registered office address in the UK jurisdiction of incorporation
- One or more directors
- One or more shareholders
- One or more shares issued per shareholder
- A Memorandum of Association with the name of every shareholder
- Adoption of Model Articles of Association or altered/bespoke Articles that comply with company law
- Service address for each director
- Disqualified directors and undischarged bankrupts may not be appointed as directors or secretaries
- Pay £13.00 incorporation fee to Companies House
Disclosure and maintenance of corporate information
The statutory company information you provide during and after incorporation will be available to the public on the official register of companies. It is for this reason that you will have to file financial accounts, confirm company details each year on an annual return and make your statutory records available for inspection by HMRC and the public.
If any details supplied on the company formation application change after incorporation, you have to tell Companies House as and when any changes take place. You can carry out all of these statutory obligations online.
Register for company taxes
When you start selling goods and/or services through your limited company, you will have to register for Corporation Tax. You can do this online. You may also have to register your company for VAT and PAYE.
Register for Self-Assessment
As a company director, you will have to register online for Self-Assessment in order to pay your Income Tax and National Insurance. At the end of every tax year, you must send a Self-Assessment tax return to HMRC and pay your personal tax and NI liabilities. In order to pay yourself a director’s salary, your company will have to be registered as an employer.
Work out your company’s taxes
You will have to complete financial accounts for Companies House even if your company is not trading. For HMRC, you will need to complete a Company Tax Return and financial accounts in order to work out how much Corporation Tax you owe. You may also have to prepare VAT returns and payroll information.
If your company is not trading, you do not have to send a tax return or accounts to HMRC, because your company will be classed as ‘inactive’ for tax.
Private limited company (LTD) equivalents in other countries
|Country||Private Limited Company equivalent||Abbreviation equivalent|
|Argentina||Sociedad de Responsabilidad Limitada||(S.R.L)|
|Austria||Gesellschaft mit beschränkter Haftung||GmbH|
|Belgium||Besloten vennootschap met beperkte aansprakelijkheid; Société privée à responsabilité limitée||BVBA; SPRL|
|Chile||Sociedad de responsabilidad limitada||LTDA|
|China and Hong Kong||有限公司|
|Colombia||Sociedad de Responsabilidad Limitada||Ltda|
|Croatia||Društvo s ograničenom odgovornošću||d.o.o|
|Czech Republic||Společnost s ručením omezeným||Spol s.r.o|
|Denmark||Iværksætterselskab; Anpartsselskab||IVS; ApS|
|France||Société à responsabilité limitée||SàRL|
|Germany||Gesellschaft mit beschränkter Haftung||GmbH|
|Greece||Etería Periorisménis Euthínis / Εταιρεία Περιορισμένης Ευθύνης||E.P.E; Ε.Π.Ε|
|Hungary||Korlátolt felelősségű társaság||kft|
|Iran||شرکت با مسئولیت محدود (Sherkat ba Masouliyat Mahdoud)|
|Italy||Società a responsabilità limitata||S.r.l|
|Japan||Kabushiki gaisha or Kabushiki kaisha||K.K|
|Korea (South)||유한회사 or 有限會社 (Yuhan hoesa)|
|Latvia||Sabiedrība ar ierobežotu atbildību||SIA|
|Lituania||Uždaroji akcinė bendrovė||UAB|
|Luxembourg||Société à responsabilité limitée||S.A.R.L|
|Poland||Spółka z ograniczoną odpowiedzialnością||Sp. z.o.o|
|Portugal||Societate cu răspundere limitată||S.R.L|
|Romania||Societate în comandită pe acţiuni||S.C.A|
|Russia||Zakrytoe aktsionernoye obshchestvo; Закрытое акционерное общество||ZAO; ЗАО|
|Saudi Arabia||شركة ذات مسئولية محدودة|
|Switzerland||Gesellschaft mit beschränkter Haftung||GmbH|
|Ukraine||Приватне підприємство; Privatne Pidpriemstvo||PP; ПП|
|USA||Limited liability company or Professional limited liability company||LLC or PLLC|
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