What is a Limited Company?
A limited company is a type of business ownership which is registered with Companies Houses. A limited company is a separate legal entity, and the director is not the owner but the shareholder of the company.
The following are the general requirements that one has to fulfill for and after registering as a limited company
The limited company has to pay the corporation tax return every year to Her Majesty’s Revenue and Customs.
- The employees working at the company and the director have to pay the Income tax.
- The company has to file the annual accounts every year with the Companies House.
The following are the various advantages and disadvantages of a limited company
Advantages:
- By selling the company’s shares, a limited company can raise money.
- Incorporating helps the company to receive more tax advantages.
- Shareholders can sell their shares in a limited company.
- There’s more potential for a business to grow in a limited company business ownership setup.
- Limited companies have limited liabilities and will only lose the money that they invest in the company.
- Companies who have registered as limited companies have complete ownership and control over the company’s name.
- More capital can be raised from investors.
- Limited companies are known to be bigger and well-established.
Disadvantages:
- Limited companies are expensive to establish.
- While selecting the company’s name, one has to follow certain protocols and limitations.
- Establishing a limited company is more time-consuming.
- The details of the limited company are all put on the public
Sole proprietorship and a limited company are definitely different from each other and here are the major differences between the two
Differences based on employment status:
Sole proprietorship: A sole proprietorship owner is self-employed.
Limited company: A limited company owner is not considered as self-employed but as an office holder.
Differences based on pension:
Sole proprietorship: A sole proprietorship owner can only have a personal pension.
Limited company: If the owner employs more than five employees in their company then they can avail for a Stakeholder Scheme Pension. Company schemes are provided for a limited company owner.
Differences based on Accounts:
- Sole proprietorship: The owner prepares the annual accountants for their own personal tax return which is also known as Self-Assessment tax return. The owner has to make sure that the accounts are made by keeping the accounting rules and standards in mind. The accounts are kept private and are not sent to Her Majesty’s Revenue and Customs (HMRC) unless there’s a requirement or emergency.
- Limited company: The various provisions of the Companies Act are followed in order to prepare the accounts. Unlike a sole proprietorship, Her Majesty’s Revenue and Customs (HMRC) needs complete accounts of the company and in particular for the Corporation Tax. Corporation Tax is a type of tax that is levied on the profits obtained by the companies or businesses. The accounts are prepared to keep the accounting standards and rules in mind.
Differences based on Expenses:
- Sole proprietorship: A part of an expense that relates to the business can be used to claim the same part against tax. Tax reliefs can be obtained for expenses that were made solely for trading or business purposes by the owner of the company.
- Limited company: In a limited company the company obtains tax reliefs for expenses that were made solely for business Private payments or expenses are considered as dividends.
Differences based on Tax-free benefits and incentives:
- Sole proprietorship: Tax-free benefits and incentives are not applicable to sole proprietorship owners.
- Limited company: A limited company obtains several tax-free benefits and incentives such as employment incentives and others.
Differences based on Company or Business sale:
- Sole proprietorship: When the business is sold, the owner is taxed on any gain or profit under the Capital Gains Tax (CGT) protocols. To avail an Entrepreneur’s relief the disposal has to gain up to £5
- Limited company: The Company has to pay corporation tax on any profit that the company makes and tax charges are doubled.
Differences based on Insolvency:
What is insolvency? Insolvency is a situation where the company’s liabilities or debts are higher than their assets.
- Sole proprietorship: The owner of the company is completely responsible and accountable for all debts and will be liable for the same.
- Limited company: If a limited company director continues to trade, even after knowing that the company is insolvent then the director will be held accountable for it and would lead to personal bankruptcy.
Differences based on Losses:
- Sole proprietorship: The sole proprietorship owner has to offset the losses of the company to their other income.
- Limited company: The limited company owner has to offset the losses of the company to the company’s other income and not to their personal This is the major difference between sole proprietorship and a limited company. In a sole proprietorship, the owner is accountable for all debts and losses and in a limited company the company as a whole is accountable for all debts and losses and not the director.
Differences based on Tax:
- Sole proprietorship: A sole proprietorship owner has to pay tax on all profits that they again above their personal For the year 2016-2017, the personal allowance is £11,000. If the person receives profit that is above their personal allowance, then they have to pay at a rate of 20% for up to £43,000 income, 40% for over £43,000 income and 45% for over £150,000 income.
As a sole proprietorship owner, one has to consider two forms of national insurance, Class 2 and Class 4.
Class 2: At £2.80 per week (£145.60 per year), the Class 2 rate form of National Insurance is paid.
Class 4: Class 4 insurance is paid on the level of profits obtained by the sole proprietorship owner. The lower limit is £8,060 and the insurance rate for that is 9% on profits made.
- Limited company: For a limited company, the corporation tax has to be paid at a rate of 20%. The dividend allowance are provided for first £ 5000 of dividends.
Differences based on Administration:
- Sole proprietorship: Registering, operating and administering a sole proprietorship is relatively easier than that of a limited company. One can set up for a sole proprietorship by contacting Her Majesty’s Revenue and Customs (HMRC) and registering for Self-Assessment Tax Returns. The owner of the company has to file for self- assessment tax return every year and pay the tax before 31st of January. Failure to do so would lead to payment of penalties and late fines.
The owner has to report three figures if their annuals sales are below the Value Added Tax threshold. The three figures are that of total sales, total expenditure and the total profit made. Tax returns are simpler for sole proprietorship and can be prepared by the owner.
- Limited company: To start a limited company, one has to register with the Companies House with a company name that is unique and not similar to any other company or business’s name. After registering, the Companies House will provide an incorporation certificate that consists of the company number and confirmation that the company or business is a legal entity.
The ones who own the company are known as shareholders and receive dividends. The shareholders, in turn, appoint directors who receive salaries. All details of the company are placed on public record, and the process of tracing and verification is easier with limited companies than with sole proprietorship. The company has to file accounts, corporation tax returns and annual returns with Her Majesty’s Revenue and Customs and Companies House. The accounting process for a limited company is more complicated than that of a sole proprietorship, and it is advisable to hire an accountant to prepare the annual returns, corporation tax returns, and other necessary accounts.
Differences based on profits:
- Sole proprietorship: A sole proprietorship owner has to pay tax on all profits that he or she makes and can be from their personal income or other sources of income.
- Limited company: A limited company can choose not to pay all the post- tax profits as dividends and build up profits of their company.
Overall, both sole proprietorship and a limited company have pros and cons and it’s up to the individual to decide which one would suit their needs and requirements.
