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This is a company where the privately owned or publicly owned shares in the company are held by shareholders (whether private individuals or the general public). The shareholders can include the directors of the company.
There are three types of limited companies:
- A private company limited by shares - the members’ liability if the company is wound up is limited to the amount unpaid on shares that they hold.
- A private company limited by guarantee - the members’ liability is limited to the amount they have agreed to contribute to the company’s assets if wound up.
- A public limited company (plc) - The company’s shares are offered for sale to both the general public and members by floating on the stock markets. Their liability is limited to the amount unpaid on shares held by them.
What are the advantages of forming a limited company?
A limited company is regarded as a separate legal person in its own right (it is a separate ‘entity’) and therefore is separate from those who run it and has limited liability if the company fails.
Unlike a sole trader (someone running a one-person business) or a partnership, the limited company will have a separate legal existence. This means it will be the company itself which owns property and contracts will be signed on behalf of the company. The directors, management and employees of the company can only act as agents.
The company will continue to trade regardless of whether the directors or management change. Therefore unlike partnerships, the company is not dissolved on the resignation, bankruptcy or death of a director. The company can only be ‘killed off’ by either winding up, liquidation, or order of the Registrar of Companies or by the courts.
Another attractive feature is that there is limited liability. This means that the shareholders’ liability is limited to the value of the shares held by them should things go wrong. The personal assets of the directors cannot be seized to pay off debts.
Only property owned by the company can be touched (except in the case of fraud when the directors may be found personally liable for losses if they knowingly incurred debts they knew or should have known the company could not or was unlikely to repay).
Registration of a limited company will protect the company name selected. This is because the name has to first be approved first by Companies House, who maintain a register of company names to ensure that the name chosen is not already in use.
There are also many tax advantages which Companies can get the benefit from. These advantages are very dependent upon the exact situation of the Company but in short Corporation Tax is based on the profits of the company after director muneration, and is lower than personal tax. Furthermore the profits of the company can then be distributed to the shareholders of the company which are then near tax free, up to the higher rate where the rate is effectively 25%. In addition to this these dividends are National Insurance free.
Who can form a limited company?
One or more persons can form a limited company as long as they comply with the requirements of the Companies Act 2006 and the company is registered at Companies House.
The following people are prevented from becoming directors of companies:
- A person who has been disqualified by a court from acting as a company director, unless the court has given them permission to act as a director for a particular company.
- A person who is an undischarged bankrupt.
- Anybody over the age of 70, if the company is a plc or a subsidiary of a plc, unless a general meeting of the company specifically approves their involvement.
- The Companies Act 2006 has introduced that anybody under the age of 16, this is enforced from 1st October 2008.
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