Limited Liability Company Frequently Asked Questions

Why Form a UK Limited Company?

Limited Company Formation removes business liability from partners & soletraders

Limited company formation in the UK turns a company into a corporation ie. a separate legal person distinct from shareholders. A partnership is merely the aggregate of the partners and a sole trader is the same legal person in business and personal life. Limited Company Formation therefore separates business risk from the shareholders personal assets whereas partners and sole traders remain liable personally for all business debts.

Advantages of Limited Company Formation:-

Limted Company Formation means that the debts and contracts of the limited company are those of the company and not those of the members, whereas in the case of a partnership every partner is jointly and severally liable with the other partners for all the firm's debts and obligations incurred while he is a partner.
Limited company Formation allows the company to exist until it is wound up. It is not affected by death, bankruptcy, mental disorder or retirement of members.
Limited company formation means that the property of a limited company belongs to and is vested in the company. It is not affected by change of ownership of shares in the company. In a partnership the property belongs to the partners and is vested in them. This means that there are changes of ownership of, and in the formal title to, the firm's property from time to time on the death or retirement of a partner or trustee. In a company, transfer of shares does not affect the title to the company assets.
Subject to any restrictions in the articles, limited company formation enables the shares in the company to be transferred easily or mortgaged without the consent of the other shareholders in a limited company formation.
Limited company fomation means that shareholders have limited liability. Liability in the case of a company limited by shares is limited to the amount unpaid on the shares held.
Limited company formation enables management of the company to be separate from ownership and therefore provides continuity after share holder changes.
Limited company formation means that the taxation of the company is more flexible than other types of organisations. A Limited Company is liable only for tax on its profits, and this is payable by the Company and not personally by the directors or shareholders. The profits of a company are not therefore subject to personal taxation higher rates. Directors pay tax on their personal income. The Company is taxed on profits after all expenses including directors remuneration have been deducted.
Limited company formation enables you to conduct business in the UK and/or in order that a given business activity may fall under English law
Limited company formation menas that the capital, to fund the company, may be obtained with relative ease when compared to other business types. Floating charges for example can be created over company assets but not partnership assets and borrowing may be by way of debentures.
Limited Company formation enables tax planning, for directors holding shares, in the following areas:
- Offshore tax planning
- Pensions
- Retirement Inheritance Provision
- Government grants and business expansion schemes
- Personal loans
- UK tax shelters
- Investment planning

And the disadvantages of limited company formation

Limited company fomration requires more formalities to be observed and therefore more publicity. eg filing of memorandum and articles, keeping company registrar upto date with changes, filing the annual return.
Limited company formation requires the accounts open to public inspection. All companies must file annual accounts with the company registrar. However there are special provisions for small and medium companies (as defined by the Companies Act).

(NB. Where we refer to a partnership above the point is equally valid for a sole trader)
The limited company is owned by its members (the shareholders) and run by the director (or directors) whose assets are protected from loss if the business should fail. Because a company is a legal entity in its own right the business can continue despite the resignation or death of any directors or shareholders and the sale of the business or the introduction of outside investors is simplified.

A small company is one that meets at least two of the following conditions:

annual turnover must not be more than £2,800,000
the balance sheet total must not be more than £1,400,000
the average number of employees must not be more than 50

A medium sized company must meet at least two of the following conditions:

annual turnover must not be more than £11,200,000
the balance sheet total must not be more than £5,600.000
the average number of employees must not be more than 250
The balance sheet total is the total of the fixed and current assets.

Small companies must deliver the following:

Abbreviated profit and loss accounts
Special auditors report (if required)

Medium sized companies must deliver the following:-

Full balance sheet
Abbreviated profit and loss account
Special auditor's report
Director' s report
Notes to the accounts