What is a Limited Liability Company? initial loans (2023)

Setting up a limited liability company is a popular way to start a business.

Find out what it's like to form a limited partnership, how it works, and the rules to follow to decide if it's right for your business.

Many start-ups decide to operate in the form of a limited liability company.

Unlike working assole proprietorship opens in a new windowwhether there are oneassociation opens in a new windowA limited partnership is an independent legal entity.

It has a different structure and more complex requirements, such as different loads andlegal obligations opens in a new window.

The main difference between running a sole proprietorship and setting up a limited liability company is that a limited liability company has a special status under the law.

Part of the definition of a limited liability company is that it is incorporated (formally incorporated and registered with Companies House) and issues shares to its shareholders.

Limited companies can be private or public.

Unlike a corporation where shares are traded on an exchange, a limited liability company does not publicly trade shares and is limited to a maximum of 50 shareholders.

An example of a limited liability company is typically a local retailer, such as a store or restaurant, that does not have a nationwide presence.

An example of a corporation is a large corporation, such as a chain of stores or restaurants, whose shares can be bought and sold by anyone.

Most limited liability companies are small businesses as there is no minimum capital requirement to form a limited liability company other than the issue of at least one share.

Initial share capital is usually around £100 and bills filed with Companies House are usually amended bills.

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What is the definition of a limited liability company?

A limited liability company is the most common form of company formation in Britain.

It is configured directly by registering the company with Companies House.

It operates as a legal entity separate from its directors and shareholders: the company is an “individual” in itself.

This means that all assets, debts andearnings will open in a new windowthey belong to the company itself and the partners are not fully liable for the debts of the company.

Being a director of a limited company is different from being a directorfreelancer opens in a new windowor run a sole proprietorship.

The director of a limited liability company is considered an employee of the company and in case of lawsuits or debt problems, the limited liability company itself is sued or prosecuted, not its directors.

This means that in a corporate bankruptcy, the personal assets of the director, such as the family home or savings, are not at risk, unlike a sole proprietor who is personally liable for any unpaid debts or legal bills arising from a dispute or insolvency.

The shareholder's liability is limited to the shares he holds in the company, hence the "limited" part of the corporate structure name.

There are many features of a limited liability company including things like borrowing money,pay pension opens in a new window, the reportopen trading accounts in a new window, sell the company orcapital increase opens in a new windowand how do you pay yourself.

Who can form a limited liability company?

The owners of limited liability companies are called stockholders and each of them owns a certain number of shares in the company.

This means that you alone (you would own 100% of all the shares) or together with others can form a limited liability company, dividing the available shares among the partners.

To become a shareholder, you must buy one or more shares issued by the company. These are issued when the company is incorporated, with each share representing an equal percentage of the company.

Additional shares can be created and issued after the company is registered, and the more shares you own, the higher the percentage of the company you own.

Who runs limited liability companies?

Directors, also known as corporate officers, manage limited liability companies and may also be shareholders.

A limited liability company must have at least one director and most business owners are directors, meaning you can own and manage a limited liability company alone or with others.

What are the advantages of a limited liability company?

While incorporating and operating a limited liability company can be a time consuming and demanding task, there are some obvious benefits to forming a limited liability company.

  • limited liability– since business owners are not required by law to repay outstanding business debts that exceed the value of the stock they own, this protects business owners' personal assets (such as homes or savings) in the event of business failure.
  • professional situation– a limited partnership is often considered a more professional activity than an unincorporated partnershipsole proprietorship opens in a new window. This is due to the transparency of company accounts, which must be disclosed together with details of directors and persons with significant influence. Other companies have more trust in companies.
  • Tax effective income– a limited liability company can be a tax-friendly way to pay yourself, within legal limits. Entrepreneurs and directors can pay themselvesPAY-salariesand then supplement that with shareholder dividends after paymentcorporate income tax opens in a new window. Because corporate income tax is paid on profits, dividends paid are not subject to IAS.
  • Protect your company name– when you start a business, your name is protected and other companies are not allowed to use this name or a similar name commercially.
  • Increase capital– You can raise additional capital by selling shares in your limited partnership to help invest and grow your business. The good news is thisinvestors opens in a new windowThey are also insured in case of bankruptcy of the company, and their risk is limited to the value of the shares they own.
  • Doing business with other companies“Simply put, most larger companies will not do business with unincorporated companies such as sole proprietors, so you may need to operate as a limited partnership to provide goods and services to other companies.

What are the disadvantages of a limited liability company?

Forming and managing a limited liability company is not an easy task and while there are many benefits to it, it is worth paying attention to the potential drawbacks of forming a limited liability company.

  • Legal requirements– there are many requirements such as completing annual accounts and reports to Companies House, filing a corporate income tax return with HMRC, setting up and running a PAYE and payroll system and preparingquarterly VAT returns open in a new windowfor HMC. If you miss a deadline or make a payment due to HMRC, the company risks a hefty fine.
  • Pay– Unlike a sole proprietorship, which can withdraw cash from the business without any restrictions, withdrawing cash from a joint stock company is more complicated. As an owner or director, the company is legally required to give you money in the form of salary or dividends, which means you cannot simply use the company as a source of personal income. You'll have toregister for PAYE at HMRC opens in a new windowEven pay yourself as a director and keep a monthly payroll to collect your salary.
  • Mounting and closing– Forming a limited liability company is easy, but it does require you to register with Companies House, report to HMRC and pay annual fees. If you decide to terminate the limited partnership, you must request a dissolution of the partnership. This can take up to three months.

Taxes, Profits and Losses of a Limited Liability Company

A limited liability company must register with HMRC and pay corporation tax on profits made in the financial year, and corporation tax is added to all income taxes and national insurance contributions (NICs) payable by employees and directors.

A limited liability company can also pay dividends to shareholders, who are subject to income tax, although they are exempt from IAS.

Payments to employees must be made through PAYE and the company must also pay NICs to HMRC as part of the employee's wages.

Employee wages are classified asBusiness expenses will open in a new windowhowever, it can be offset against income and all other expenses.

This means that a limited liability company canPayroll opens in a new window, incur costs and purchase servicessuppliers opens in a new windowand still count them as expensesthe tax compensation due will open in a new windowfrom the revenue generated by the company.

The company's profits are then subject to corporate income tax at the current rate of 20%.

Pensions, loans and bills.

Unlike sole proprietorships, public limited companies also differ in terms of pensions.

Company pensions open in a new windowcan be generous in terms of benefits and limitations, while an individual entrepreneur may only have onepersonal pension opens in a new window.

However, a limited partnership must consider the retirement plans for all employees.

Directors can also borrow from a limited liability company, but note that loans that are not repaid within nine months of the end of the year are taxed at 32.5%.

Finally, in the case of a limited partnership, financial statements must be prepared and filed with HMRC and Companies House on an annual basis and must comply with accounting standards.

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References to organisations, companies or events on this site do not constitute an endorsement or recommendation of British Business Bank or the UK government. While we do our best to keep the information on this site up to date, we do not warrant (implicitly or otherwise) that it is current, accurate or complete. The information is for informational purposes only and does not take into account your personal circumstances, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information applies to your particular situation and seek professional or specialist advice or support where necessary.


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