Forming a Business

2. Limited Company

Trading as a limited company can be a good way of limiting the risks of personal financial loss.

2.1 Your liability is normally limited to the amount you agree to invest in the company by buying its shares.

• If your business goes into liquidation owing money, the creditors are paid out of the sale of the assets of the company. The creditors might include suppliers, employees, your bank, or HM Revenue & Customs.
• Under normal circumstances, creditors have no legal right to obtain repayment from the directors or other shareholders of the business. The debts of the company should not affect the directors' personal credit ratings.

2.2 You can raise money for the business by selling shares in the company to interested parties, including other businesses.

• You may wish to tie in key managers by offering them a stake in the business.

2.3 Having a limited company may make it easier to raise other types of finance.

• A bank can take fixed and floating charges over the assets of the company.

2.4 Limited companies pay corporation tax on their profits. (See Corporation tax).

• Directors and other employees pay income tax on salaries and benefits through PAYE.

2.5 You must submit annual accounts and tax returns to HM Revenue & Customs, and file a set of accounts with Companies House to make information on the company's finances publicly available. There are fines if you miss deadlines or submit incorrect information.

• Most small companies with a turnover of less than �6.5 million do not need to have their accounts fully audited and so are not required to appoint an auditor. Those turning over between �6.5 million and �25.9 million do not need a full audit but still require a report from a qualified accountant. (See Preparing for your annual accounts).

2.6 There are a number of other statutory requirements that you must fulfil on an annual or ongoing basis.

• For example, your Annual Return to Companies House must contain various details of the company and its directors.