In the UK, different business types have different impacts on corporate nature. Whether you choose to set up a private limited company, partnership, or do business on your own, the right entity type will build a solid foundation that supports your business’s greatest potential.
1. Most common business entities in the UK
The business structures in the UK are classified according to three primary factors: ownership, tax implication, and liability. Here’s a quick look at the differences between the 3 most common types of entities:
Sole proprietorship – The simplest option of the three, which offers complete managerial control to its owner. Despite the simple setup, a sole proprietor is normally tied to personal assets, meaning you could lose personal property and savings to pay for any lingering debt.
Partnership – A partnership involves two or more people agreeing to share in the profits or losses of a business. As easy as it is to form, it is equally easy to get into trouble since you are jointly liable for all the debts or negligent acts from your partners. Partnerships in the UK are subject to “pass-through taxation”. This means that the partnership is not itself liable to tax. Instead, the legislation taxes the partners directly on their share of income.
Private limited company (LTD) – The LTD is probably the most popular business structure in the UK, accounting for 92.8% of total entities. An LTD exists in its own right as a separate entity and offers personal liability protection to its owners. No matter what happens to the company, business owners can rest assured that their assets are fully protected.
Among other types of business in the UK, LTD is considered one of the best entity structures around, especially for SMEs and startup owners in terms of personal assets protection and favorable tax regime.
The following section gives you a closer look at LTDs’ advantages as well as the requirements for private limited company formation in the UK.
2. Advantages of a private limited company in the UK
An LTD is a separate legal entity with its own assets and limited liabilities. Overall, the advantages of private limited companies in the UK include:
Personal liability protection – Any outstanding debts and liabilities cannot affect you personally. You can rest assured that no matter what happens to your business, your personal properties are safe.
Flexible structure – An LTD can be collectively owned by as many as 50 people. You can arrange ownership – any person, partnership, even corporation can be the owner. You can decide what percentage of the profits to give to whom, and assign the scope of each manager’s power to deal with business’s day-to-day affairs.
Professional status – Forming an LTD can add valuable prestige and credibility to your business. This is due to the fact that they are much more thoroughly monitored than other structures, with compliance obligations and reporting requirements in place. Adding Ltd after your name helps reassure your clients that you are legit and official.
Funding opportunities – Due to the more ‘official’ nature of incorporation, LTDs may find it easier to secure funding from banks and private investors than sole proprietors.
Tax benefits – Forming LTDs guarantees a favorable tax regime to your company, paying 19% corporation tax on profits. Plus, LTDs’ dividends are not subject to National Insurance Contribution, meaning the owners can take home more of their income from the business in the form of dividends.
3. Disadvantages of a private limited company in the UK
Personal information disclosure – When forming an LTD, a wealth of information is displayed on the public record (via the Registrar of Companies), which increases the risk of disclosing private information of the owners and the LTD itself.
Strict record-keeping procedures – LTDs are required to adhere to strict bookkeeping practices, including taking minutes of meetings and recording all decisions taken by directors and shareholders.
Name restrictions – LTDs’ names are subject to certain restrictions and must be registered and approved by the Companies House.
Difficult money withdrawal – An LTD is a legal entity in its own right, which means the assets and profits belong to the company, not the owners. Therefore, the money cannot be easily taken out of the business. Unlike a sole trader, whose personal and company’s assets are one and the same.
4. Requirements for formation of Private Limited Company in the UK
4.1. Pick an LTD’s name
It is not generally possible to form an LTD in the UK with a name that has already been registered. Business owners should conduct a series of searches, including searches at Companies House and the UK Intellectual Property Office, as well as other sources of information, for relevant names.
In several cases, an LTD’s name may not include certain words without the prior approval of the Registrar of Companies or the provision of third-party consent.
4.2. Complete the registration process
After picking the name, an LTD is then incorporated by filing the following documents with the UK Registrar of Companies:
- A signed Memorandum of Association (a statement that a person wishes to form a company and has agreed to become shareholders of the company);
- Signed Articles of Association (the rules under which the company will be run);
- Completed form IN01 (details of the registered office, directors, share capital, shareholders, people with significant control, and a statement of compliance stating that various requirements have been met).
Additionally, an LTD must:
- Have at least one director;
- Have at least one shareholder;
- Appoint an auditor to review and prepare a report for the company's accounts;
- Keep proper records of its shareholders, members, directors and secretaries, etc.;
- Register an office address in the UK; and
- Submit an annual return and statutory accounts to the Registrar of Companies, as well as having the accounts approved by the directors/shareholders.
When all formalities have been satisfied, the Registrar of Companies will issue a certificate of formation which indicates that the company is officially established and may commence trading immediately.
4.3. Pay the corporation tax
The one main tax on LTDs’ profits is corporation tax, which is currently set at a rate of 19% (in the 2021/22 tax year). Tax rates are fixed in advance each year and must be paid to Her Majesty’s Revenue & Customs (HMRC) within 9 months and 1 day of the LTD year-end.
Within three months of trading or becoming active, a UK LTD is required to notify HMRC that it falls within the charge to UK corporation tax. Failure to notify can result in a penalty.
The business owners will still need to pay personal tax on any salary or dividends taken from an LTD via Self Assessment. However, with careful planning, the amount of tax can be minimized.
4.4. Set up a bank account
Typically, all new companies will need to open a bank account in order to conduct their business in the UK.
Before setting up a bank account, an LTD will go through customer due diligence. This is part of the anti-money laundering regime of the UK banks and is a key requirement of the Money Laundering Regulations 2007 in the UK.
Opening a bank account for LTDs should not be underestimated and needs to be done as soon as possible. This is particularly important if business owners intend to have direct payment arrangements set up to enable employees to be paid directly by bank transfer from the outset of business.
5. Duties and responsibilities of an LTD in the UK
According to the Companies Act 2006, a private limited company has certain duties and legal responsibilities to be complied with. These include:
- Complete and file annual accounts and Confirmation Statements with Companies House annually by the due date.
- Submit records for persons of significant control (PSC). A PSC is someone that holds more than 25% of shares or voting rights in a company, has the right to appoint or remove the majority of the board of directors, or exercises significant influence or control.
- File your accounts to HMRC.
- File a corporate tax return when there is a notice from HMRC.
- Maintain company records and report changes.
- Notify shareholders of any personal benefit from a transaction the company makes.
6. BBCIncorp – your trusted company formation service provider
An LTD is undoubtedly one of the most ideal business structures in the UK. If its favorable nature has piqued your interest somewhat, and you want to start a private limited company as your business structure of choice, you can wrap up the whole process by yourself in a matter of weeks.
Even better, if you contact BBCIncorp, we can take care of it for you.
BBCIncorp has vast experience in registering UK establishments and banking support. Our overseas banking connections include some of the largest commercial banks such as HSBC, Citi Bank, Standard Chartered, DBS, OCBC, etc.
If you need further consulting, our experts are always available to assist you. Just drop us your questions at email@example.com.