At its most basic; a limited liability company is a manmade device created in-order to separate an individual or a group of individuals from their business activities and hence limit their liabilities to the investment they made into their company. By contrast, liability is completely open ended for sole traders and those who have set-up a standard partnership: in both cases, all the personal assets of either the individual or the partners involved may be subject to 3rd party legal claims and it will not be limited to what they may have invested into their business. Worse still, in the case of partnerships exposure is not necessarily equal even when there is a 50:50 partnership since the law dictates that all partnership assets are potentially available to 3rd party claims, which means that wealthier partners are far more exposed than poorer ones in real terms.
What are the tax consequences? Once it is accepted and understood that a limited liability company is at law an entity separate to its shareholders and directors – think of it as its own person – it logically becomes clear that it should (just like another person) be taxed on its own terms again separate from its shareholders and directors. In most developed countries a limited liability company is often taxed at a more advantageous rate than that afforded to individuals primarily on the basis that encouraging profits to be kept in a limited company encourages enterprise and national fiscal growth – This logic is certainly employed in the UK and the shareholders of a limited company in effect get both limited liability protection and lower taxes! These two ‘killer’ facts mean that the vast majority of new business enterprises select to start as a limited liability company. However, for the more adventurous there are now Limited Liability Partnerships (LLP’s), which provide very similar benefits to a traditional limited liability company but unlike limited companies are fiscally transparent – A factor that should be considered carefully before proceeding.
The principal features of UK companies are:
- Directors can be either individuals or corporate entities;
- There need be only one director;
- There are no residency or nationality restrictions for directors;
- A company secretary can be either an individual or company and may or may not be resident in the UK;
- All companies must have at least one subscriber/shareholder at the time of incorporation;
- All companies must have a registered office address within either the English & Welsh, Scottish or Northern Irish jurisdictions;
- A company submitting its annual return must be very specific about its objects and chose from a list provided from the Standard Industrial Classification (SIC) Code;
- Both own-name and ready-made/shelf companies are widely available;
- Companies House can electronically register companies in as little as 3 hours if submitted by an authorized agent such as the SCF Group or its UK company formation division StartingMyBusiness.Biz;
- Since 1989 companies have not legally required a seal to give effect to their contracts and legal documents etc. However, seals are still very popular since their use is clear evidence that a company intends to bind itself;
- The UK does not impose any duty on initially issued or allotted share capital although subsequent transfers should be verified by a stock transfer form (CF40) and stamped by the Stamping Office;
- Shares should ideally be denominated in Pounds Sterling but technically can be denominated in any legal tender currency;
For more information on UK Company Formation services, please speak to a tax planning consultant