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What is a limited liability company?

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Published: 27th January 2020

A limited liability company is a popular corporate structure that offers many benefits to business owners. Companies limited by shares are used by profit-making organisations and differ from companies limited by guarantee, which are intended for charities and non-profits.

When a limited liability company is registered with Companies House it becomes a separate legal entity from its owners and can take actions in its own right, so what does limited liability actually mean?

What is limited liability?

Limited liability means that shareholders are only liable to repay the sum they’ve invested in the company in the event of insolvency. So if a shareholder purchased ten shares at £10 per share, they would only have to repay £100 if their company fell on hard times and couldn’t pay its debts.

Limited liability is also known as a ‘veil of incorporation’ as it protects directors and shareholders from being sued, and also safeguards their personal funds.

How is a limited liability company set up?

Limited companies must be included in the Register of Companies at Companies House, and their name is then protected in law. Various legal documents are required when forming a limited liability company, including Articles of Association and Memorandum of Association.

These set out how the company must be run by officers, and provide notice of a person’s intent to become a shareholder. A limited liability company agreement, also known as a shareholders’ agreement, may be written, and this also defines how the company will be run.

It’s a useful document that can provide a guide for resolving company disputes, although it isn’t required legally.

What are the advantages of running a limited liability company?

No personal liability

Unless the directors are found to have traded wrongfully/unlawfully, other forms of misconduct have occurred, or they’ve provided personal guarantees for company borrowing, they hold no personal liability for the debts of the company.

Tax-efficiency

Limited companies pay corporation tax on their taxable income at a flat rate of 19%, making this a tax-efficient structure when compared with sole traders – sole traders pay upwards of 20% income tax on their profits depending on their tax band, as well as class 2 and class 4 National Insurance Contributions (NICs). Limited company directors can also receive a proportion of their salary through PAYE, with the remainder in dividends taxed at a lower rate.

Leaving money in the company

Directors can also choose to leave surplus funds in the business if they wish, to prevent being pushed into a higher tax bracket in any given year.

Are there any disadvantages?

Disadvantages of setting up a limited liability company can include:

  • More complex accounting, filing, and reporting requirements
  • Publicly disclosed information about directors and the company
  • Higher accountancy costs

If you would like more information on limited liability companies and whether they would be the best business structure for you, please contact one of our experts at Real Business Rescue. We can offer you a free same-day meeting, and operate a large network of offices around the UK.

Jonathan Munnery

Partner

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