Private limited companies are one of the most popular business structures in the UK today. There are numerous benefits, including favourable tax positions and reduced liability. Best of all; setting one up is easier than ever before.
What is a private limited company?
Private limited companies are established legal identities that separate the company’s finances from that of its directors. Ownership is typically shown through shares although in some cases – typically charities and third sector organisations – directors act as guarantors by pledging a fixed amount of capital in the event of the organisation’s demise.
Benefits of private limited companies
Private limited companies offer a range of benefits to owners, making them one of the most popular company structures in the United Kingdom:
• Reduced liability – by establishing the business as a separate legal identity owners can reduce their personal liability should the business fail
• Legal separation – because the company has its own legal status it’s easier to separate private and public lives. The company is totally distinct from its owners and can sue/own assets in its own right
• Funding opportunities – due to the more ‘official’ nature of incorporation, limited companies may find it easier to secure funding from banks and private investors than sole traders
• Name protection – incorporation protects your business name – and names regarded as too similar – and prevents others using it when trading.
• Reputation – you may find it easier to gain clients and business partnerships as incorporation is seen as a more professional, authoritative option than operating as a sole trader
• Tax benefits – sole traders typically pay more tax than owners of private limited companies. Whilst company profits are subject to corporation tax, directors are able to take a salary directly in addition to shareholder dividends that are taxed separately to normal income. This can produce a favourable return over having all income taxed via standard PAYE and NIC rules as a sole trader.
Business requirements
Firms must fulfil certain requirements when starting a private limited company:
• The company must be registered and incorporated with Companies House
• Annual accounts detailing specific financial information must be sent to Companies House
• HMRC must be informed if the business is profitable or receives taxable income
• Corporation tax must be paid to HMRC within nine months of the company’s end of year
• Annual Return must be provided to Companies House each year in addition to a small fee
• Employees must pay income tax and national insurance contributions on monies earned through the business
• Companies with annual turnovers of £70,000 or more must register for Value Added Tax
Registering with Companies House
Companies House, an executive agency of the UK Government, is the official registrar of companies and is responsible for all issues related to company incorporation. To incorporate as a private limited company, the following information must be sent to Companies House:
1) Form IN01 ‘Application to register a company’
a. A unique and valid company name – check availability
b. The company’s registered office
c. Names of director(s) and company secretary (if applicable)
d. Subscriber details
e. Share capital details and prescribed particulars relating to share classes
2) Memorandum of Association
a. Includes names and signatures of those subscribers who are forming the company, including a commitment from each subscriber to take at least one share (not applicable for companies limited by guarantee)
3) Articles of Association
a. Contains operational details including internal management affairs, liability guidelines and other important information. These are the company’s rulebook or constitution. If using standard Model Articles they do not have to be filed with Companies House
The above articles should be sent, with the appropriate fee, to Companies House. Details of where to send this information can be found on the Companies House website.
