What is a Limited Company?

A limited company is a separate legal entity from its owners. These are the basic facts:

• The business is owned by the limited company, not you.
• The company must have at least one shareholder.
• It must also have at least one director. There is no longer a requirement for private companies to have a company secretary.
• The shareholders do not have to be directors. Directors are treated as employees of the company, but they do not have to draw a salary form the company.
• If you are the only shareholder, you will have sole ownership of the company, and are likely to also be the director who runs it.
• The company pays corporation tax on its profits.
• The company is governed by company law.
• Reserves are distributed to the shareholders by virtue of dividends, dividends can only be distributed after the corporation tax liability has been calculated and accounted for.

What are the main advantages of using a Limited Company?

• A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.
• The liability of its shareholders is limited to the amount of the share capital issued and so offers protection to the shareholders' personal assets. In the event of company failure and not being able to pay its creditors, your personal assets are protected. However, banks, landlords and others will often require personal guarantees from the shareholders or directors when dealing with small limited companies.
• A Limited Company has better borrowing potential than an unincorporated business as it can use current assets as security by creating a floating charge over its assets.
• You can use shares to enable different people to hold different proportions of ownership of the business that they can pass onto the next generation.
• You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn't wish to take part in the management.
• Having a limited company can create significant tax advantages by having profits taxed at Corporation Tax rates which are lower than the higher rates of personal tax. However, when the funds are extracted from the company extra personal tax charges may arise.

What are the Main disadvantages of using a Limited Company?

• Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
• Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.
• A company is more complicated to wind up.
• Any losses made by the company cannot be used against the owner's other income.

What is a Partnership?

A partnership is two or more people carrying on business together with a view to making profit, although partnerships can also be formed between companies, or between an individual and a company.



The partners in a general partnership are all joint and severally liable for partnership debts, although this does not apply to personal tax bills based on partnership profits.

It is advisable to have a partnership agreement to document the business arrangement between the partners, including how profits will be shared and how partners will join and leave the partnership. Even a husband and wife partnership should have a written partnership agreement, as this can be used to show the Revenue that both parties are actively involved in the business and have a right to share the profits.

What is a Limited Liability Partnership?

LLPs are treated like a normal partnership for tax purposes but the members of the partnership have the protection of Limited Liability.

A LLP is a separate legal entity and can enter into contracts and deeds, sue and be sued in its own name. With normal partnerships every partner has to be party to certain documents and litigation.



As with Limited Companies, the LLP must file annual accounts at Companies House together with certain other information.

What is a Soletrader?

This is the simplest form of business to start where you carry on business on your own account. You are liable to income tax and Class 4 National Insurance on your profits. You can employ people including your spouse, as long as they are paid only for the value of work actually performed.

That’s all for today folks. Read about the different types of taxation in the UK in our next blog!