A LTD Company is a “separate legal entity” this means that its like a separate person when it comes to law. It can make contracts, enter into them, sue and be sued. It offers Limited Liability to its shareholders (assuming nothing illegal is performed). Typically one person forming a LTD Company will become its sole Director and sole Shareholder. Companies can have different Shareholders and Directors, and the Directors are effectively employed by the Company and its Shareholders to carry out the business in the interest of the Shareholders.
- Limited Liability for its Shareholders – so the most they could loose is the value of the shares purchased on incorporation. (Again assuming no illegal practise)
- Reputation – Business’s generally prefer dealing with a Limited Company
- Tax – A Company pays Corporation Tax on its taxable profits. A Shareholder is able to extract funds via “Dividend” – which is taxed at a lower rate than under Employment Tax. If this is an owner managed business, there are tax advantages for the “owner”.
- There are other tax advantages, but too many to detail in this overview.
- Need to complete accounts and file with Companies House. Therefore information about your business is available on public record. Typically you will need an accountant to do this for you which comes at a price.
- Need to complete Company Tax return.
- Greater level of accounting records needed and therefore costs associated with this.
- Director(s) will need to complete Self Assessment returns in order to pay tax.
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This is how most people will start off in business as it is easier that forming a Limited Company. You only need to inform HMRC that you are starting a sole prop business so you can pay the necessary National Insurance Contributions.
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