When approaching restructuring your business, limited liability structures are one of the most popular options. But did you know that there are actually three different variations – limited by shares, limited by guarantee or a limited liability partnership? So how do you know which is right for you?
When a company is limited by shares, it is owned by shareholders, each of who will have a certain number of shares in the company that they own. A private limited company is one where shares can’t be bought and sold on the open market and can have just a single shareholder who effectively owns the entire company.
In this situation, if the company is liquidated or wound up, each shareholder would only need to pay the value of their share towards any money owed to creditors – hence ‘limited liability’.
Often, in a single shareholder situation, that person is also the company director. If as a director you have given your personal guarantee to cover any company debts or have been found to have done something legally wrong, then you may have to pay the debts in total, rather than being limited by shares.
This kind of company has to be pay corporation tax on profits and anything left over can be paid to shareholders – this is known as a dividend.
You can read more about how many shares you can issue at the time of incorporation.
When a company is limited by guarantee, it doesn’t issue shares and doesn’t have shareholders. Instead, it has members who will have control of the company – they can appoint and remove directors, for example as well as vote on matters at the AGM.
Within the company’s articles, each member will have a liability that they would have to pay if the company was wound up. This is usually just £1 per member. Company directors in this situation can be liable for company’s debts in the same way as a company limited by shares.
This company structure means it cannot pay dividends from any profits. Therefore charities, social enterprises and not-for-profit organisations use this structure – the benefit instead goes to the community rather than the individual. Any profit made would still be subject to corporation tax unless the company is registered with HMRC as a charity.
You can find out more about forming a company limited by guarantee here.
The third option is a limited liability partnership or LLP. This is a combination of a partnership and a company limited by shares. It has members rather than shareholders and partners rather than directors. Normally, members and partners will be the same people but a corporate body, such as another company, can be a member and partner in an LLP. There needs to be a minimum of two members and partners in an LLP.
The company doesn’t pay tax on its profits in its own rights. Instead, partners pay income tax and Class 4 National Insurance contributions on the share of the business profits that they receive as long as the liability is not limited. So if the company makes a loss, these can be used to claim back tax on the partner’s other income if they have other jobs. If the LLP is wound up, it becomes liable to corporation tax in its own right.
You can read more about forming a LLP here.
If you are running a business for profit, then either limited by shares or LLP are the ideal company structures. If you are running the company that you own then you would need to set up the company itself to become the second member of an LLP. However, if you are unsure what choice to make, you can get advice from our company formation experts to make sure you get the right option.
When you are ready to take the next step and want to turn your business into a legitimate, professional company, take a look at our Limited Company Packages comparison page to select the best company structure to suit your business needs.