Whether you are just starting out, or considering transferring your business to a limited company, there are many factors to consider. There is certainly no right answer for every business. We strongly recommend that you take professional advice should you be considering whether to trade as a limited company or as self-employed.
Limited liability vs Self Employment
A major advantage of operating your business as a limited company is that your personal assets are generally not at risk. A shareholder can only be liable for the amount invested in their shares. Assuming there are no irregularities a director will only be liable for amounts, if any, that they have personally guaranteed. Many business people feel a greater sense of control when operating their business bank accounts, assets and liabilities within a limited company.
External perception
In return for limited liability, a company must publish certain financial information by filing accounts at Companies House. Although these accounts only show balance sheet items (small businesses do not currently have to disclose turnover, costs or profits) credit rating agencies and external stakeholders can take some assurance that the business is sound by reviewing the publicly available information. Many banks, suppliers and customers are more comfortable when dealing with a limited company compared to a sole trader.
Types of company
Choosing the right legal structure is essential for any organisation. Below is a comparison of three common UK company types: Companies Limited by Shares, Companies Limited by Guarantee, and Community Interest Companies (CICs).
Overview Table
| Feature | Company Limited by Shares | Company Limited by Guarantee | Community Interest Company (CIC) |
|---|---|---|---|
| Purpose | Profit-making | Non-profit / charitable | Social enterprise |
| Ownership | Shareholders | Members (no shares) | Shareholders or members |
| Profit Distribution | Allowed to distribute | Not typically allowed | Restricted (asset lock applies) |
| Liability | Limited to unpaid shares | Limited to guarantee amount | Same as underlying company type |
| Regulator | Companies House | Companies House | Companies House & CIC Regulator |
| Formation Document | Memorandum & Articles | Memorandum & Articles | Memorandum, Articles & CIC Statement |
| Public Benefit Requirement | No | Often implied | Yes – must pass community interest test |
| Common Uses | Commercial businesses | Charities, clubs, associations | Social enterprises, community projects |
Company Limited by Shares
- Ideal for: Businesses aiming to make profits and distribute them to shareholders.
- Structure: Owned by shareholders; managed by directors.
- Liability: Shareholders’ liability is limited to the amount unpaid on their shares.
- Tax: Subject to Corporation Tax. Owner managers can be paid by dividends which can be marginally less overall tax than paying by salaries.
Company Limited by Guarantee
- Ideal for: Non-profit organisations such as charities, clubs, and associations. Grant providers prefer to work with companies limited by guarantee.
- Structure: No shares; members act as guarantors.
- Liability: Members’ liability is limited to a fixed amount (usually £1).
- Tax: Subject to Corporation Tax. Owner managers cannot be paid by dividends so must be paid by salary.
Community Interest Company (CIC)
- Ideal for: Organisations that want to use profits and assets for public good.
- Structure: Can be limited by shares or guarantee.
- Regulation: Must satisfy the community interest test and comply with an asset lock.
- Tax: Subject to Corporation Tax; not eligible for charitable tax relief. Owner managers cannot be paid by dividends so must be paid by salary.
Summary
- Choose a Company Limited by Shares if your goal is profit and growth.
- Choose a Company Limited by Guarantee if you’re forming a charity or non-profit.
- Choose a CIC if you’re running a social enterprise with a clear community benefit
Accountancy fees
Preparing and filing accounts and annual returns for a limited company is straightforward, although a little more involved than for a sole trader.
Disincorporation
Transferring from a limited company back to a sole trader or partnership is usually more difficult and more expensive in tax than becoming a limited company. You should not begin to trade as a limited company, or convert to one, with an expectation of being able to revert back without significant additional costs.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
