Looking for a better definition of what a limited company is and whether it's right for you?
First of all, the business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with.
When starting a business, to set up a Limited Company offers the individual protection by limiting their liability. Any loan or credit agreements would be in the name of the company offering a degree of safety to the individual.
Added to this, there is a perception that a Limited Company is a superior entity than a sole trader which may assist in winning new business. However, there are statutory requirements in and around operating a Limited Company that inevitably means increased levels of paperwork.
A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company.
If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee.
The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability.
Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.
There are many advantages as well as disadvantages to operating through a limited company. You need to consider the relative merits of ‘incorporation’ as well as the downsides of operating as a company.
New companies can be purchased in a ready-made form usually referred to as ‘off the shelf’ companies. These types of formation are becoming less frequent however as the speed of which companies can now be created takes on average 3 hours rather than days.
There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.
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