Whatever type of company you choose to form, the journey of starting your new company can be overwhelming. Whether you’re launching as a sole trader, or you’re in the process of private limited company formation, you must fully understand the advantages and disadvantages of your type of company.
The Definition of a Private Company Limited by Shares
Most private companies registered in the UK are companies “limited by shares”. One of the major incentives for such a company structure is that it exists as a separate legal entity from the individual owner.
Since a limited company is a distinct legal entity that is comprehensively separate from the company’s owners, the company itself holds responsibility for its finances and debts. In this respect, the owners benefit from lower financial responsibility for company debts — this is known as “limited liability”.
Note: Although a lot of limited companies are limited by shares and owned by their shareholders, some companies are limited by guarantee and are owned by guarantors (non-profit organisations where trading profits are not distributed to owners prefer to be limited by guarantee). Additionally, the major plus of a limited liability company over a sole trader is the fact that the latter holds full liability.
How to Form a Company Limited by Shares
A private company limited by shares is not difficult to incorporate. Additionally, due to the limited financial liability of a private company limited by shares, there is relatively little risk in this selection. Use the following as a guide to ensure you form a private company limited by shares correctly:
- Any private company limited by shares has to be registered with Companies House — a unique company name is required in order to receive approval
- You must have a registered office address that will stand as the official company address and appear on public record. Note: This must be a complete physical address (not a PO Box Number) in the same country as the company is registered.
- At least one director and one shareholder (minimum) is required to set up a private company limited by shares. A director and shareholder may be the same individual.
- In order to outline your business’ activities, Standard Industrial Classification (SIC) codes need to be included. A maximum of four codes can be provided.
- Details of a person of significant control (PSCs) in the company must be included on the application. Invariably, the PSCs are the shareholders and directors.
- In order to list the names of the company’s first shareholders (known as subscribers) you must complete a Memorandum of Association, coupled with their intention to form the company and take at least one share. Note: A “subscriber” is the first member of a private limited company. During company formation, subscribers will include their names in the memorandum of association, which is a confirmation that the original limited company shareholders have agreed to become company members. Even if they leave the company after some time, the shareholders are included in the public register and remain on the memorandum.
The articles of association (a governing document) must be adopted during your company’s incorporation. The articles of association outline the rules and regulations of the company and its members and officers. It’s important to learn how to get a copy of the memorandum and articles of association.
Filing Requirements of a Private Company Limited by Shares
A private company limited by shares must follow a number of filing requirements and financial reporting regulations as set out in the Companies Act 2006.
There is more filing and accounting responsibility with a limited company in comparison to a sole trader business. As stated, it is a legal requirement to annually prepare and process a Confirmation Statement along with statutory financial accounts to Companies House. Annual statutory accounts document details about your company’s yearly financial activity, including, sales, expenditure, assets, and liabilities.
Company Tax Returns and complete financial accounts must be filed with HMRC as well as payment of corporation tax on all taxable profits if your company is trading (20%). VAT may need to be paid if your annual turnover exceeds the current threshold of £85,000. Some companies register for VAT voluntarily as it portrays a professional image to clients and suppliers.
You must also report any significant changes to your limited company to Companies House and, in some cases, HMRC.
The Advantages of a Private Company Limited by Shares
The credibility of a limited company and a “proper” business organisation is highly appealing for many entrepreneurs in addition to the following advantages:
- Limited companies are distinct legal entities, separate from the owners.
- A limited company provides limited liability; this means the personal finances /assets of shareholders/guarantors are protected over and above their agreement of investment/guarantee to the company.
- Limited liabilities exude a professional and credible status.
- Although a limited company may be managed by one individual, it’s invariably perceived as a larger and more established corporation.
- Limited companies are comparatively more appealing to a wider range of potential clients.
- It’s often less challenging to raise capital from lenders/investors with a limited company.
- Scaling and growing a business is often easier when set up as a company.
- A limited company can remain in existence even if the original company owners are no longer involved.
- Limited companies are more tax-efficient.
- Directors can pay themselves a combination of salary and dividends, which has far better tax implications.
- Shares can be sold in in exchange for capital investment.
The Disadvantages of Private Company Limited by Shares
Since you will need to make an informed decision when it comes to company registration, here are some points to consider about a private company limited by shares:
- Although company registration is not particularly time-consuming, a limited company must be incorporated at Companies House.
- Registration with HMRC for corporation tax purposes is a must.
- Limited companies may be comparatively more expensive to set up.
- There are certain restrictions when selecting a company name.
- You cannot register a limited company if you’re an undischarged bankrupt or disqualified director.
- A registered office address must be in the same region of the UK where the company was incorporated.
- Directors, subscribers, secretaries and People with Significant Control (PSCs) have to provide a service address.
- Information such as details of the registered office address, service addresses, directors, shareholders, PSC details, filing history and financial activity are placed on the public record.
- Administrative tasks are far simpler in a sole trader business as accounting and filing tasks are time-consuming in a limited company. Hence an accountant may need to be hired.
- Money cannot be displaced from a limited company on a whim. Before doing so, the company must have enough net profit and certain procedures must be adhered to when paying yourself money.
If you’re a sole trader looking to set up a limited company, you must understand the differences between the two types of company structures to prepare yourself for the change. Essentially, a sole trader is a self-employed individual. And unlike limited companies, there will be no legal distinction for sole traders between themselves and their business.
Above all, there are a number of advantages to forming a company limited by shares, and as long as you acknowledge the filing requirements involved with a limited company, you’ll be well prepared to submit those all-important important documents in a timely manner.
If you want to find out more about a private company limited by shares, contact our professional and experienced company formations team now for fast, friendly, and comprehensive advice.