What is a limited company?

A Limited company is a separate legal entity and, as the names implies, the shareholders have a limited liability. This means that in most circumstances the shareholders cannot be held responsible for the debts of the company.

This could be an advantage for a new business venture but in practice the major creditors of a new venture, banks, etc. may ask for personal guarantees from the shareholders which would negate any personal protection.

It should be emphasised that the shareholder is separate from the director and although in a small company the shareholders and the directors may be one and the same persons, they are legally entirely different and have different responsibilities and liabilities.

A Limited company will require an audit undertaken only if the turnover exceeds £5.6 million per annum.

What tax is paid by a limited company?

For a company, corporation tax is payable nine months after the year end at rates varying from 20% (21% from 01/04/2008 and 22 % from 01/04/2009) for small companies to 30% (with an effective marginal rate of 32.75%).

You will pay tax at your highest personal rate on the monies that you take out of the business as salaries, benefits in kind bonuses or dividends.

What is a limited liability partnership?

A limited liability partnership is a partnership with limited liability registered at Companies House.

This type of partnership is taxed as a partnership but has to file accounts and annual returns like a limited company.

The partners of the limited partnership will pay tax under Schedule D at the partner’s appropriate individual rate of tax. National Insurance Contributions under class 2 and class 4 are also paid by the partners of the partnership.

The disadvantage of the limited liability partnership is of course that it cannot retain income for future investment at a lower rate of tax as a limited company can.

A limited liability partnership will need an audit on its annual accounts if its turnover exceeds £5.6 million per annum.