Many small businesses operate via private limited companies. There are around 1.15 million limited companies operating in the UK currently, compared to around 2.8m sole traders and 500,000 partnerships.
So, what is a private limited company?
- Under the limited company business structure, your company and personal finances are kept separate, unlike the sole trader structure.
- Limited companies are subjected to corporation tax on their profits, whereas sole traders are taxed under the self assessment system.
- If your limited company is going to turnover £73,000 or more per year (from 1st April 2011. Previously it was £70,000), you must register for Value Added Tax.
- Limited company directors have more legal, financial and administrative responsibilities, whereas sole traders have an easier life when it comes to paperwork.
- A private limited company is owned by its shareholders
- If things go wrong and a limited company fails, its directors and shareholders have ‘limited liability’ in that their personal assets cannot be touched. For sole traders, their personal liability is unlimited.
- A private limited company cannot offer shares for sale on the stock market, whereas a Public Limited Company can.
- All limited companies must be registered at Companies House.
- All limited companies should submit an ‘Annual Return‘ (Form AR01) to Companies House each year as well as their annual accounts.
- In some industries, most businesses are limited companies for a number of reasons – it may look more ‘professional’, it may help if you need to raise external finance, and it may be more tax efficient than other business structures.
- Since April 2008, limited companies have no longer been required by law to have a company secretary. They can now operate with just a sole director.
- You can read more about the steps involved in the limited company incorporation process here, and also a good legal overview of all the main business structures.
- You can set up a limited company right away with our long-term company formations partner, Duport.
- Our partner site, Contract Eye, offers further advice if you’re looking at setting up an IT contractor limited company.
Before you start
When making the choice of business structure, you should always consult a professional, as each business has different needs.
There is no ‘right’ or ‘wrong’ business structure to use -it all depends on what you do, your financial situation, the industry you are in, and how large your operation is likely to become.