Limited Companies

What is a Limited Company?

Limited companies are organisations set up to run a business, sometimes as an alternative to being a sole trader. Should things go wrong, any shareholders and directors will not be liable for the Company debts unless they have personally guaranteed them. A limited company is separate to its directors and shareholders, who in small businesses are often the same individuals.

Shareholders and Directors

Limited companies are run by directors who in some cases are also shareholders. Directors tend to run the Limited Company on a day-to-day basis, whereas shareholders own a stake in the company.

How can you tell whether a company is limited?

These types of business usually end in either ‘limited’ or ‘ltd’, and must be registered at Companies House. If you form a limited company, HMRC also needs to be notified of the date you begin your business activities.

As well as this, a limited company needs to have been granted a ‘certificate of incorporation’, ‘articles of association’, as well as a ‘memorandum of association’. These documents will include details of how your business is run.

Limited Company Responsibilities  

As previously mentioned, Limited Companies are often set up to limit business liability for the director and shareholders. There are, however, a few circumstances when they will be liable:

  • Director’s offences found during Insolvency proceeding. This is when a limited company goes through formal insolvency proceedings and the director is found guilty of wrongful or fraudulent trading.
  • Personal Guarantees. When applying for credit from a bank or supplier, the director may be asked to be the guarantor. In the credit agreement, the director agrees to be personally liable should the Limited Company be unable to pay
  • Income tax (PAYE). This is used by HMRC (Her Majesty’s Revenue & Customs) to collect income tax from a person’s wages at the source. If a limited company is formally closed, as a director, you’re not usually liable for your own PAYE. As a director is technically an employee of the company, in certain circumstances HMRC can ask you to make an arrangement to repay the money.
  • Directors Loan account When a director owes the Company money, and the Company enters insolvency, the Director can be asked to repay the money.

How do limited companies differ from Sole Traders and Partnerships?

In a limited company, the shareholders and Directors are not personally liable for the Company’s debts except in limited circumstances.  A sole trader and Partners in an Unlimited Liability Partnership are liable for all the debts of their business. As such, personal assets (including homes) will not be protected.

What happens when limited companies struggle with business debt?

You should think carefully about whether trading through financial difficulties is the best idea. Completing a business budget sheet showing the company’s incoming and outgoing cashflow will help you do this.

If all this seems a little overwhelming, seek help from your accountant.

Top tip

By creating and sticking to a budget, you’ll make your business more attractive to potential investors and bankers, so it’s always worth having one prepared.

 Getting help through a Self-Employed IVA

If you are self-employed and unable to pay the debts you are personally liable for, a Self-Employed IVA (Individual Voluntary Arrangement) may be the right solution.

With a Self-Employed IVA, you could be debt-free in as little as five years, and still keep your business trading. A significant amount of the debt you are personally liable for can be written off. What’s more, you should be able to repay the rest in manageable monthly payments – with no added interest, no threats of legal action, and no more chasing from your creditors.

If you or your limited company is facing difficult with debts, get in touch with PayPlan today. We will help you find a solution that’s right for you.