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Advantages of Limited Liability Company Formation

Nov 9, 2007
Registration 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 Companies House which must be updated and confirmed each year through the Companies House Annual Return. Audited financial accounts must be filed annually both with Companies 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 articles of association may require more than one, and each company must have at least one designated 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 of forms, 10 and 12, plus a memorandum and articles of association to complete the company formation and registration. Companies House Form 10 provides details of the first directors and intended situation of the registered office. A name check should be carried out with Companies House to ensure the proposed name is available and suitable and the proposed limited company name entered on form 10 with limited as the last word. Also check addresses and post codes with Royal Mail to avoid the registration being rejected. Companies House form 10 must be signed by either by or on behalf of the subscribers to the memorandum of association.

Companies House Form 12 is a legal declaration that the 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 designated 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 company stating the 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.

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 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 pounds 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. 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 company that should financial difficulties present themselves and insolvent becomes a real prospect 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.
About the Author
Terry Cartwright, a Chartered Company Secretary, provides inexpensive company formation document packs at Company Formation and a company formation Incorporation service at Limited Liability Company assisting many individuals starting a limited company
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