A limited liability company formation carries a number of substantial benefits to small and medium sized self employed businesses. A limited company formation effectively creates a new corporate body distinct from the owners of the business, shareholders, which protects those owners 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 responsibilities to being self employed. The 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.
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.
Limited Liability Company Formation
Starting a limited liability company in the UK is not complicated, company formation requiring the two Company House forms, 10 and 12, and the submission of 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 Formation and Corporation Tax Advantages
Sole traders pay income tax while 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. Prior to 5 April 2006 there was a considerable tax advantage in a company formation as the first £10,000 of taxable profit made by a limited liability company was zero compared to being self employed where the normal tax allowance as an individual might be £4,895 and 8% national insurance contributions also being charged on net self employed profits.
The zero tax rate for the first £10,000 of limited liability company net profit was removed in the 2006 Budget leaving the corporation tax payable on net profits of £0 – £300,000 for small companies at 19%. The scale of the tax advantage in incorporation is dependent upon the level and expected level of net profit. Generally self employed businessman paying all his tax at the lower income rate of 22% would not gain a significant tax advantage, while anyone paying the personal tax rate of 40% would show significant tax advantages compared to the corporation tax rate of 19%.
Advantages of a Limited Liability Company
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. Generally 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.