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Advantages Of Being A Limited (Ltd) Company In The UK

When setting up a new company or changing your business structure, it’s important to thoroughly consider the pros and cons of the options available to you.

The main advantages of being a limited company in the UK include;

  • Limited liability
  • Tax advantages
  • Increased credibility for customers
  • Transferable ownership
  • Access to Government Support

Read on for more information on the advantages and some disadvantages of being a LTD company along with some tips on setting up this type of business including the best way to pay yourself from business profits.

What is a Limited Company?

A limited company is one of the most popular business structures in the world. Limited companies are a completely separate legal entity from the people who own them which offers them protection should the business come into financial or legal difficulties.

This is in contrast to a self employed person where the business and the individual are fully merged. As a result, a limited company can agree contracts, own assets like property and be held accountable without the individual owners being at risk financially.

Many small businesses start as sole proprietorships (self employed – where the business and the owner are the same entity) or partnerships (two or more people own and run the business together). As the business grows, it’s common for the owners to incorporate as a limited company to take advantage of the protections that this type of company can offer.

What Are The Advantages of Being a Limited Company?

The main advantages of the limited company set up include:

    • Limited liability: This is the separated legal entity of the business from its owners. This ensures that any personal assets like property or cash that belong to the business owners are not put at risk should the company itself go bust or get sued.
    • Increased credibility: Due to the higher amount of financial and business reporting required to set up and run a limited company, they are generally seen as more credible business set ups in the eyes of customers.
    • Tax advantages: The UK Government offers lots of types of tax relief for small businesses operating as a limited company. For example, there is tax relief on certain business expenses and corporation tax rate brackets. As a business owner, if you pay your own salary from business profits, you only have to pay income tax and National Insurance on that salary.
  • Transferable ownership: New owners and investors can be brought in and the business sold on via the sale of shares
  • Access to Government Support: Government incentives are available for limited companies including grants and tax relief that are not available for sole traders.

What are the Potential Disadvantages of a Limited Company Structure?

Some disadvantages of the limited company structure include:

  • More paperwork and compliance: Annual tax returns, AGM’s, company reports and statutory registers of members directors and officers must all be set up, completed on time and kept up-to-date.
  • Information is publicly shared: As a limited company your accounts and the names of directors and owners have to be publicly filed. This means that potentially sensitive information is available to view by anyone through Companies House.
  • Lack of personal service income: The money the business makes belongs to the business and not the people who run it so there are additional steps required for them to take money out of the business via PAYE and dividend payments.
  • Regulations: Health & Safety, regulation of shares, Employment law and Corporate Governance Regulations must be adhered to as a limited company.
  • Audit Risks: The Government can randomly audit a limited company to ensure they’re meeting all laws and reporting requirements. Big penalties are due should non-compliance be found.
  • Increased set up & running costs: There is a fee to pay to companies house for registering a limited company, and annual accounts must be prepared by an accountant. These are costs that don’t affect sole traders.
  • The potential for double taxation: If your company makes a profit, you will have to pay corporation tax on that profit. If you then want to take that money out of the company, you will have to pay income tax and National Insurance on it as well.

How to Set Up a Limited Company in the UK

Setting up a limited company can be done in a few simple steps:

  • Choose your company name and register it with Companies House: Your name will need to be original and you can have an alternative trading name if your official name is a bit of a mouthful! The business name must end in Limited or ‘Ltd’
  • Appoint Directors and Shareholders: The company directors and shareholders hold overall responsibility and own the company.
  • Open a business bank account: You will need a dedicated business bank account to operate as a limited company
  • Tax Admin: You must register with HMRC to pay corporation tax, PAYE (payroll) and VAT (if turnover is greater than £85,000 a year).
  • Maintain necessary records: Statutory registers, minutes for AGM meetings must be kept and filed with HMRC

Whilst the setting up can be completed in 1-2 days, you must then be prepared to follow the rules and regulations required for a limited company.

The Most Important People in a Limited Company

There are several key roles in the management of a limited company. The people assigned to them must be prepared to take their job seriously and complete the necessary legal compliance.

The shareholders, directors and company secretary are all official job titles within a limited company.

Shareholders:

The shareholders are the people who own the company. Each will own a number of shares that directly relate to the proportion of the company that they own. Their power lies in being able to add or remove directors if they are not happy with the way the company is being run or performing.

It’s common practice to have a shareholders’ agreement in place. This sets out the rights and responsibilities of each party and can help to resolve any disputes that may arise.

The shareholder with the most shares in the company is the ‘controlling shareholder’ which gives them the most power and influence over the company.

Requirements to be a shareholder: 

  • 18 years old or over
  • A company or individual
  • Don’t need to live in the UK
  • Can appoint directors at the Annual General Meeting (AGM)

Directors

Directors are in-charge of the day-to-day running of a company. This includes meeting its legal responsibilities and financial obligations. They can also appoint the company secretary, and manage the strategy and business decisions.

Whilst they don’t need to run every decision past the shareholders, they must run the company in the best interests of its shareholders. Directors oversee the preparation of the annual accounts and AGM’s where they must report on the performance of the company and set out future plans to keep shareholders in the loop.

Requirements of a director:

  • Must be over 16 years of age
  • Cannot be bankrupt or have been banned from being a director by a court order
  • Must have a valid UK residential address
  • Can be shareholders
  • Appoint the company secretary

Company Secretary

A Company Secretary is the person responsible for keeping the requirement records and legal compliance up-to-date.

Requirements for a Company Secretary:

  • Cannot be the sole director of the company
  • Must be over 16 years of age
  • Must have a valid UK residential address

When operating as a limited company, the key players involved all have specific roles and responsibilities. Before accepting a role or assigning one to another person, make sure that the individual is fully capable of meeting the demands of the role assigned. In each of the positions above, organisation, a clear and logical head, and attention to detail are important qualities.

Tax Obligation for Limited Companies

Taxes are a necessary part of business. For limited companies, corporation tax, VAT and dividend tax are the key ones to be aware of.

Corporation tax is currently set at 19% of the company’s taxable profit. Taxable profit is worked out by deducting all allowable expenses from the total revenue generated.

Dividends are payments made to shareholders. These payments are taxed based on the individual’s personal tax band and relates to their overall income.

If the company turnover more than £85,000 a year, it must be registered for VAT. VAT is then charged on all applicable goods and services sold at a rate of 20%. This rate can be adjusted by the Government in the annual budget.

To summarise and account for these taxes, each limited company must file annual accounts and each shareholder and director must submit a personal self-assessment tax return to HMRC. Failure to do this will lead to financial penalties.

Paying Yourself as a Limited Company

When working for a limited company as a director, there are two ways to pay yourself; dividends and salary.

  • Salaries: Just like regular employees a director can earn a monthly or annual salary. This will be taxed under the PAYE payroll system before it reaches them.
  • Dividends: Additional payments can be made that are based on the profits made by the business. These are called dividend payments and are only made after corporation tax has been paid.

The biggest difference between the two comes down to tax payments. Salaries count as business expenses which can reduce the overall business profits. Dividends have a lower tax rate of 7.5% for basic tax rate payers compared to 20%-40% tax that would be charged on wages processed through PAYE.

Many business owners of limited companies choose to pay themselves a lower monthly salary and then get the majority of their income through dividends.

By using a combination of salary and dividends, it can be a tax efficient way to receive the income that you need to support your living needs. A business accountant will be able to advise on the best way to structure your payments for the most tax efficient outcome.

How to Choose Between Dividends and Salary

Accounting analysis is needed to decide on the best way to structure your payments as a limited company owner. Should you use dividends or salary or both?

Ultimately, it should come down to what’s best for you and the company, and this will be dependent on the tax implications and your day-to-day living expenses requirements.

Here is a worked example to illustrate the different scenarios

  • A company makes a profit of £100,000
  • If you take a £25,000 salary, you would pay income tax of £2,48 and £2,003 in National Insurance, leaving you £20,511 take home pay.
  • If you take £25,000 as dividend payment, you would pay £912.62 tax, leaving you £24,511 take home pay.

Whilst on the face of it, taking the dividend would seem more profitable to you personally, but you must take corporation tax into account too. This tax is paid after you have made salary payments but before you take dividends and this is where it’s beneficial to hire an accountant to ensure that you’re making the right decision for you.

For example:

  • The company makes £150,000 profit
  • You take a £50,000 salary (£15,495 Income Tax and National Insurance)
  • This leaves £100,000 profit in the business.
  • The company then pays £19,000 corporation tax on this £100k leaving £81,000 post corporation tax profit available for dividends.
  • Taking £81,000 as dividends would result in £6,075 dividend tax and £74,925 remaining
  • The end result would be a £50,000 salary and £74,925 dividends = £124,925.

In this example you can see that the £19,000 corporation tax reduces the dividends available and this highlights how an experienced accountant can help you to find the optimal salary to take based on your personal situation.

Final Thoughts

It’s clear that there are a number of advantages of being a limited company in the UK, but there are plenty of things to consider before deciding if this is the right business set up for your company.

That decision should be made by considering how much control you want to keep over your business, whether you want your records publicly available, if you want to work with other shareholders or keep sole ownership, and plenty more.

To keep the business running smoothly, always ensure that you keep on top of accounting, reporting requirements, have correct insurance in place, understand your role within the business, especially if taking on one of the key roles explained above. Appointing a solicitor and accountant can be one of the most useful expenses incurred in running a limited company as it can save you time and money in the long run.

Ensuring that you appoint the right people into the key roles of a limited company can make the difference between seeing your business flourish or decline.

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