Businesses that want to trade as limited companies must be registered with the Companies House under the provisions of the Company Law. Currently in the UK these companies must be registered under the provisions of the Companies Acts 2006 which became effective from 2009.
Limited companies can either be private companies or publicly listed companies. Publicly listed companies are listed on a stock market, which is also an additional regulator for publicly limited companies. Private limited companies must display the letters “Ltd” or the word limited at the end of its name and publicly listed companies should display the letters “PLC” or the words publicly limited after its name.
Consequences of Operating as a Limited Company
Forming a limited company is one option that is available to business owners. It has its merits and demerits when compared to other legal forms of businesses. The consequences of operating as a limited company are discussed below.
Legal Separate Existence
Limited companies are known as such because they have a separate legal existence to that of their owners. Limited companies can sue and be sued in their own name. They can also own assets or owe other parties money in their name. This means that if limited companies make losses or are faced with financial difficulties court proceedings can be made against the companies and the properties of directors and shareholder will be protected.
Shareholders will only lose what they have agreed to contribute as share capital or equity in the business. It is important to point out that the veil of incorporation can be lifted if the directors and shareholders are deemed to have acted negligently or when they fail to exercise due care when running or managing their businesses.
Corporation Tax Obligations
Creating a limited company results in the creation of a separate legal person and this legal person will have obligations under tax law just like individual people who earn income have. Limited companies are liable to pay corporation tax on profits they make from trading just like sole traders and partners in partnerships pay income tax on trading profits.
If the limited company employs people then the company will also be liable to pay payroll taxes such as national insurance and it should also have obligations to deduct income tax or pay as you earn (PAYE) from the salaries of people the company employs.
Obligations to the Companies House
Limited companies are regulated by the Companies House and one of the consequences of trading or operating as a limited company is it must file its accounts annually with the Company House. If the company does not file its accounts in time or if it makes a late annual return then it will be penalised by the Companies House.
Small companies can file abbreviated accounts which will be made up of the profit and loss account and the balance sheet and they can also dispense with both the annual audit and the annual general meeting.
Larger and publicly listed companies must file full accounts to the Companies House which must include the profit and loss account, balance sheet, cash flow and the notes. The accounts must also be audited and must be laid at an annual general meeting to the shareholders who should approve them.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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