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What is a Limited Liability Company?

What is a Limited Liability Company? Small businesses generally choose to trade through a limited company as they can be much more tax efficient compared with trading as a sole trader or partnership. It does, however, need to be structured in the right way to take advantage of the savings available.

So what is a limited liability company?

In a limited company, the assets and debts of the company are separate from those of the shareholders.  It is a type of business where the shareholder’s or owner’s liability is limited to the amount they have invested in the shares or guaranteed to the company. 

As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders or owners will not be at risk of being seized by creditors.

In other words, the owners of a limited company are not personally liable for the debts of the company. 

COMPANIES HOUSE

Unlike a public company in which anyone can buy shares, membership in a limited company is governed by a company’s rules and law.

In the UK, all limited companies are governed by the rules and regulations contained in the Companies Act 2006, and all company registration and records are managed by Companies House.

Below information are made available publicly in the Companies House:

  • Financials/Filing History of the limited company
  • Who the directors and owners of the limited company
  • The registration office address

TYPES OF LIMITED COMPANIES

 

Private & limited by shares (LTD)

When limited by shares, a company is owned by one or more shareholders and managed by at least one director.Most small businesses or SMEs are private companies limited by shares. This means the company is divided into slices (shares) and distributed amongst shareholders with equivalent monetary values attached.

Shares cannot be sold on public markets, and the cash value of shareholders’ stakes may rise and fall dependent on the success of the company. If you are a freelancer operating a limited company, it will be a private company limited by shares in the vast majority of cases.

Private & limited by guarantee

In a limited by guarantee arrangement, a company is owned by one or more guarantors and managed by at least one director.Rather than liability being limited to their initial investment, members of companies limited by guarantee agree to pay a cash sum in the event their organisation goes belly-up. This setup is usually used by charities.

Public limited company (PLC)

A company with shares traded on public markets (the FTSE 500, NASDAQ etc.). Often a private company limited by shares will “go public” once it reaches a certain size, and the company’s shareholders will be able to offer their shares for sale to the public.

What is a Limited Liability Company – Benefits?

 

Filing as a limited company comes with a number of benefits. They include:

  • A limited company and the people who run it are legally distinct.
  • A limited company structure provides a firewall between the finances of the company and its owners.
  • A limited company is allowed to own assets and retain any profits made after tax.
  • A limited company can enter into contracts on its own.

For the privilege, limited companies in the U.K. must pay a variety of taxes, such as a value-added tax (VAT) and capital gains tax, and must contribute to National Insurance. Limited companies in the U.K. receive favorable tax treatment once their income reaches a certain threshold.   At that level, the corporate tax rate is a flat rate of 19% on profits. Find out more about different tax rates in another of our blogs

By comparison, unincorporated businesses, such as sole traders and traditional partnerships, do not afford full limits on liability for owners because there is no legal distinction between the business and its owners. If such a business were to become insolvent, its owners would be responsible for its debts.

Helpful links:

Companies House:  https://find-and-update.company-information.service.gov.uk/