What is a 'Limited' company?
Discussion
As per the title, but what is meant when a company becomes 'Limited'?
I've had a look at the Wikipedia article on the matter and being something of a layman in that kind of terminology it doesn't mean much to me.
To put it in context, I received a letter today saying the company I work for will now be referred to as "Company Name" Limited, rather than "Company Name." Its also known on the grapevine that the company is having some financial issues; is this likely to be linked to it becoming 'Limited'?
I've had a look at the Wikipedia article on the matter and being something of a layman in that kind of terminology it doesn't mean much to me.
To put it in context, I received a letter today saying the company I work for will now be referred to as "Company Name" Limited, rather than "Company Name." Its also known on the grapevine that the company is having some financial issues; is this likely to be linked to it becoming 'Limited'?
If you are a sole trader, then you can be liable for any debts that your business runs up.
A "Limited" company is a separate legal entity. So if it goes bankrupt you can just walk away.
There could be many reasons that your employer is becoming Limited. For example, if they were about to embark on a period of expansion, then it would make sense to go Limited.
Depending on the circumstances, it might just make the operation more tax efficient.
Don
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A "Limited" company is a separate legal entity. So if it goes bankrupt you can just walk away.
There could be many reasons that your employer is becoming Limited. For example, if they were about to embark on a period of expansion, then it would make sense to go Limited.
Depending on the circumstances, it might just make the operation more tax efficient.
Don
--
What the limited normally means is that the company is formed as a "private company limited by shares".
One or more shareholders puts in a bit of money to start the business. So their "capital" gets them a share in the company.
The shareholders appoint directors to run the company and hopefully every year the directors and employees' hard work turns the shareholders' investment becomes a profit, which can be split amongst the shareholders (called a dividend).
And, if the business fails, their loss will generally be limited to the shares they have bought.
You don't have to form a company. You or I could trade the same way and call ourselves "XYZ Company". But, we would presumably have to sign contracts with suppliers, sign long rental aggrements for offices, etc - and if your business fails, they can take you to court and take your house, cars, kidneys etc, probably bankrupting you.
So it makes sense for a company that has the regular ups and downs of all businesses to be limited in some way. There is a small yearly cost, but not really anything major if the company is big enough to have employees.
There are a few other types of company, like a Public Limited Company/PLC (where the public can buy and sell the shares on the stock market) or some oddities like partnerships (John Lewis) and entities like Lloyds of London.
One or more shareholders puts in a bit of money to start the business. So their "capital" gets them a share in the company.
The shareholders appoint directors to run the company and hopefully every year the directors and employees' hard work turns the shareholders' investment becomes a profit, which can be split amongst the shareholders (called a dividend).
And, if the business fails, their loss will generally be limited to the shares they have bought.
You don't have to form a company. You or I could trade the same way and call ourselves "XYZ Company". But, we would presumably have to sign contracts with suppliers, sign long rental aggrements for offices, etc - and if your business fails, they can take you to court and take your house, cars, kidneys etc, probably bankrupting you.
So it makes sense for a company that has the regular ups and downs of all businesses to be limited in some way. There is a small yearly cost, but not really anything major if the company is big enough to have employees.
There are a few other types of company, like a Public Limited Company/PLC (where the public can buy and sell the shares on the stock market) or some oddities like partnerships (John Lewis) and entities like Lloyds of London.
Edited by essayer on Friday 19th October 14:28
Thanks for the clarification chaps, there are rumours of expansion so perhaps that is why they've made this move. Either that or they are looking to make our taxation more efficient. The company is made up of several individual businesses who have been bought in to operate individually, but under the umbrella of the main company and for the 'greater good'.
These days, I would recommend that any reasonable sized business become a limited company. There is very little advantage in remaining in business as a sole trader or partnership.
Partnerships can be become Limited Liability Partnerships - which means they retain the partnership format but obtain some of the "limited liability" benefits of a limited company without actually setting up a limited company.
Partnerships can be become Limited Liability Partnerships - which means they retain the partnership format but obtain some of the "limited liability" benefits of a limited company without actually setting up a limited company.
Where I work we became a limited company a while ago, before that we were a sole-trader with sales of 15 million or so.
I seem to remember our owner (now MD) said he used the process to loan the new company a few million, then used this to purchase the assets such as buildings, stock and the customer base etc. from himself without paying tax... It made far more sense when he explained it
I know the change completely buggered up our credit rating, and there were a fair few meetings with distributors and their accountants whilst our MD personally underwrote the liabilities.
I seem to remember our owner (now MD) said he used the process to loan the new company a few million, then used this to purchase the assets such as buildings, stock and the customer base etc. from himself without paying tax... It made far more sense when he explained it
I know the change completely buggered up our credit rating, and there were a fair few meetings with distributors and their accountants whilst our MD personally underwrote the liabilities.
It depends on the extent of the borrowing and the perceived risk involved. Most modest overdrafts and bank loans normally don't require personal gurantees or charges over company or personal assets.
Obviously, serious borrowing will almost certainly entail some personal guarantee or asset charges being required.
The concept of limited liability still stands - buit it is often eroded by situations such as above. Also, the recent legislation which can make a director personally liable for injury suffered by workers or external third parties whilst engaged in an activity with the limited company further erodes personal limited liability.
Obviously, serious borrowing will almost certainly entail some personal guarantee or asset charges being required.
The concept of limited liability still stands - buit it is often eroded by situations such as above. Also, the recent legislation which can make a director personally liable for injury suffered by workers or external third parties whilst engaged in an activity with the limited company further erodes personal limited liability.
Eric Mc said:
These days, I would recommend that any reasonable sized business become a limited company. There is very little advantage in remaining in business as a sole trader or partnership.
.
Eric,.
I'm a sole trader, 3 employees, last yr turned over 220k, made net profit of 50k.
No loans or debts at all, any advantage of me going ltd, I already own the ltd name, yet it sits dormant.
My accountant says best to stay as I am, with a tax bill of 13k, plus half again to pay in jan I'd welcome any thoughts.
You are on the cusp regarding whether you would be saving tax working through a limited company.
I think if a sole trader is making taxable profits of between £40,000 and £50,000, they should be doing some sums or getting their accountant to do some sums to see what tax savings that are possible through a limited company.
This has to be weighed against the increased complexity of limited company accounts compared to those of a sole trader.
If a limited company had taxable profits of £50,000, the corporation tax liability arising would be £10,000.
If you (say) drew a dividend of £37,000 from the company for yourself, your personal income tax bill would be nil.
There could also be various permutations where youi might draw some salary, reduce your Corporation Tax bill as a result, and still pay no Income Tax.
I think if a sole trader is making taxable profits of between £40,000 and £50,000, they should be doing some sums or getting their accountant to do some sums to see what tax savings that are possible through a limited company.
This has to be weighed against the increased complexity of limited company accounts compared to those of a sole trader.
If a limited company had taxable profits of £50,000, the corporation tax liability arising would be £10,000.
If you (say) drew a dividend of £37,000 from the company for yourself, your personal income tax bill would be nil.
There could also be various permutations where youi might draw some salary, reduce your Corporation Tax bill as a result, and still pay no Income Tax.
Edited by Eric Mc on Saturday 20th October 15:20
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