Limited liability company formation carries a number of
substantial benefits to small and medium sized businesses
effectively creating a new corporate body which is a
distinct different business vehicle to the owners of the
business, shareholders who are protected from unlimited
personal liabilities in the majority of circumstances and
can carry significant tax advantages which vary from year
to year. Incorporation does carry additional legal
responsibilities to that of being self employed. Company
formation requires the submission of the incorporation
details to Company House which must be updated and
confirmed each year through the Company House Annual
Return. Audited financial accounts must be filed annually
both with Company House and the Inland Revenue. And the
provisions of the various Companies Acts must be adhered to
by the directors responsible for the affairs of the Limited
Company. Every limited liability company must have formally
appointed company officers at all times. A private limited
company must have at least one director, the company
articles of association may require more than one, and each
limited liability company must have at least one company
secretary. While a director can be the company secretary a
sole director cannot.
Forming a Limited Liability Company
Starting a limited liability company in the UK requires the
submission to Company House forms, 10 and 12, plus a
memorandum and articles of association to complete the
company formation and registration. Company House Form 10
provides details of the first directors and intended
situation of the registered office. A name check should be
carried out with Company House to ensure the proposed name
is available and suitable and the proposed limited
liability company name entered on form 10 with limited as
the last word. Also check addresses and post codes with
Royal Mail to avoid the company formation registration
being rejected. Company House form 10 must be signed by
either by or on behalf of the subscribers to the memorandum
of association. Company House Form 12 is a legal
declaration that the limited liability company formation
details are true and can be signed by a solicitor engaged
in the limited liability company formation or a person
named as director or company secretary on form 10 under
section 10 of the Companies Act 1985. The Memorandum of
Association sets out the objects and scope of the proposed
limited liability company stating the company name with
details of the subscribers to the Memorandum of Association
witnessed. Table A is a standard format of a set of
Articles of Association, a statutory document that governs
the internal affairs of the limited liability company and
it is recommended that Table A, Articles of Association is
adopted in its entirety. Following a final check to ensure
accuracy submit all 4 documents to Company House with the
company registration fee and the company formation is
complete.
Company Corporation Tax Advantages
Sole traders pay income tax on the net taxable profit which
will be reduced from 22% to 20% from 1st April 2008 on net
profits earned over the personal allowance. A limited
liability company pays corporation tax which is a tax
payable on the company net profit. The taxation advantages
and disadvantages change from year to year as government
policy in relation to tax rates and allowances change. From
1st April 2007 the rate of Corporation Tax for small
businesses was increased from 19% to 20% and is set to
increase further from 1st April 2008 to 21% and further to
22% from 1st April 2009. These tax changes narrow the gap
between the tax payable on profits by sole traders and
limited companies. The taxation balance for businesses
earning in excess of £34,840 before the owners / directors
wages remains in favour of incorporation since the self
employed profit is also subject to 8% national insurance in
addition to the 20% tax which rises to 40%. The scale of
the tax advantage by being incorporated is dependent upon
the level and expected level of net profit. Generally self
employed businessman paying tax at the lower income rate of
20% would not gain a significant tax advantage the main
difference being the national insurance of 8%, while anyone
paying the personal tax rate of 40% would show significant
tax advantages compared to the corporation tax rate of 20%
in 2007 rising to 22% by 2009.
Advantages of Limited Liability
A sole trader receives no protection from the business
liabilities should the business run into financial problems
whereas the liability of the shareholders in a limited
liability company is limited to the amount subscribed for
that shareholding. Limited liability becomes less clear in
reality. Banks and credit institutions often require
directors of a small and newly formed limited liability
company to provide personal guarantees against loans and
credit.
In addition directors should be aware when starting a
limited liability company that should that company run into
financial difficulties and become insolvent the directors
themselves may be financially liable for any debts incurred
if the company continues to trade after the directors
became aware the company was insolvent. This is why
administrators of companies that go into liquidation often
immediately cease trading to avoid themselves as
administrators being held liable for any subsequent debts
being incurred.
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