Limited Companies

What is a Limited Company?

Limited companies are organisations set up to run a business. he shareholders and directors will not be liable for it should it fail, unless they have personally guaranteed the debts. A limited company is separate to a company and its shareholders, who in small businesses are often the same individuals.

Shareholders and Directors

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

How Can You Spot a Limited Company?

These companies usually end in either ‘limited’ or ‘ltd’, and must be registered at Companies House. When forming a limited company, HMRC also has to be notified of when the company begins its 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, and are integral to the process as a whole.

Limited Company Responsibilities  

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

  • Director’s offences found during Insolvency proceeding. If 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, a director is not usually liable for their own PAYE. As a director is technically an employee of the company however, HMRC can ask you to make an arrangement to repay it. Directors Loan account Director owes the Company money, and the Company enters insolvency, the Director can be asked to repay the money.

How do They Differ from Sole Traders and Partnerships?

As we’ve already discussed, 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.

Business Debts of Limited Companies

Is your limited company is struggling to pay its 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 cash-flow 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 handy.

 Help Through a Self-employed IVA

If you are unable to pay the debts, you are personally liable for, a Self-Employed IVA (Individual Voluntary Arrangement) is a debt management solution tailored especially for the self-employed.

With a Self-Employed IVA, you could be debt-free in as little as 5 years, all-the-while keeping your business trading. A significant amount of the debt you are personally liable for can be written-off, and you repay the rest in manageable monthly payments – with no more adding of interest, no more legal action threats, and no more chasing from your creditors.

If you or your limited company is struggling to repay its creditors, get in touch with PayPlan today.