When you form a company in the UK, there are many questions to answer. One of them is what type of entity your business should be There are three main choices:
1) sole proprietorship
3) Limited Liability Company
What is a LTD corporation?
Here is the information we were able to gather.
A limited liability company (LTD) is a type of business structure that can combine the advantage of corporate tax treatment with the legal and operational flexibility associated with small businesses. The owner(s), called members, have limited personal liability for any debt beyond their investment in the LTD This means that they will not be liable for any debts incurred in the operation of the business.
A limited liability partnership is a legal entity registered with Companies House and HMRC, but it has the same advantages as a sole trader or partnership structure
– The personal assets of the members are protected against any debts arising from the operation of the business
– There is no limit to the number of members
– It is easier to raise funds because you are borrowing from a bank against your business rather than against yourself as an individual
What are the disadvantages?
LTDs have significant tax implications. Here are some of them:
– There is no personal deduction for dividends paid by companies using this structureAs a result, the company’s tax burden is higher than that of a regular company.
There are no specific rules to address this problem, so you must set up your LTD in one of two ways
o The first method is to set things up so that all profits pass through the corporation as personal income. This can be problematic if the individual goes through periods of high or low income
o The other method is to pay an annual fee for the right to use the structure. This can be costly, but is probably the best option if you plan to keep your LTD long term, as it does not affect the profits passed on as part of the dividends paid by the company
The annual fee to maintain the LTD structure is £1275.
Members’ personal assets cannot be protected in the event of company debts
You can do what most people choose and increase the liability coverage on their personal assets by using a personal liability policy. If you do not increase your liability coverage, all efforts to keep the business profitable will be met with creditor claims against members for business debts
The second method is more expensive and involves the creation of two limited liability companies (LTDs).
o One will conduct all business activities and own all the assets of the business, while the other will serve as a holding company
o This structure is not suitable if your LTD does not have employees and can be complicated to set up.
If you choose this structure, there are two LTDs
o The first LTD is responsible for carrying on the business of the second LTD and owns all the assets of the business
o The second LTD is a holding company, which allows you to avoid paying taxes on the profits made by your first LTD
What happens if creditors try to make me pay personally? (Personal Liability)
If you are an individual and have chosen this structure, there may be circumstances where you may face difficulties in protecting your personal assets
o For example, if the business owes money to a creditor and goes into liquidation or receivership, the creditors may not be able to satisfy their claims by selling the business assets. Instead, they may claim from you personally to make up any shortfall between what they are owed and what they ultimately receive from the sale of the company’s assets.