Limited Companies

Running your business using a limited company has some benefits over running the business as a sole trade or 'normal' partnership such as limited liability and possible tax savings.

Some of the considerations of running a limited company are:

Limited Liability
Whilst the potential tax savings may be the reason that an individual uses a limited company rather than a sole trade, the issue of limited liability should not be overlooked. This basically means that the shareholders are only responsible for company debts up to the limit of their investment in the share capital. For example, an individual subscribing for 100 £1 shares in a company, should only be liable for £100 of debt of the company (which is paid at the time of the share subscription) unless the individual has personally guaranteed a debt of the business.

Management & Accounts
The management of a company is directed by its Articles of Association and a company must meet its obligations under the Companies Act including filing accounts which can be accessed by the public.

It is important to remember that a limited company is a separate legal entity and that any profits that are generated belong to the limited company.
These profits can of course be withdrawn by the director or shareholder as salary or dividends, respectively. In this case the profits that are drawn are subject to income tax (see below) but any undrawn profits (after corporation tax) can remain within the business for reinvestment. This is different with a partnership or sole trade where the partners or individuals are taxed on the profits of the business, rather than the monies drawn from the business.

There may be a corporate identity advantage of trading via a limited company as the business will be perceived to be bigger than it may be. In addition, it has been known for some businesses to only do business with businesses which are limited companies.

We would recommend that if there is more than one shareholder/director that a shareholders' agreement is prepared at the outset of the business to avoid any issues further down the line if for example the directors/shareholders fall out. Even if the shareholders are husband and wife, we would recommend that this agreement is made.

Tony Luckett
Managing Partner

01325 349 700
Kevin Shotton

01325 349 700

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Personal Tax Savings
For a business that is owner managed (i.e. the person who runs the business also owns the business), then being a shareholder as well as a director means that the director can take dividends from the profits of the limited company which are usually more tax efficient than drawing a salary.
However it is a case of judging each case on its own merits as there may be reasons for taking a large salary such as the business is loss making (and therefore cannot pay dividends), the business carries out research and development, the director may make personal pension contributions or may need a salary for mortgage purposes.

Personal Tax

Company Tax
The company is required to complete corporation tax returns to declare profits to HM Revenue & Customs. Whilst corporate tax rates are lower than income tax rates, there will be additional taxes payable by the directors or shareholders on the withdrawal of monies from the company either via salary or dividend.
Normally corporation tax is payable 9 months and 1 day after the year end of the company, unless for example, the company profits exceed a certain level or there are a number of related companies.

Business Tax

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