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.
By continuing to run your business when making a loss, you may be seen as unlawfully trading.
Acting in Your Business’ Best Interests
Your ‘fiduciary duty’ as a limited company director is to act in its best interests at all times. ‘Fiduciary duty’ means both your moral and legal duty to do the ‘right thing’ for your business.
If you fail to stick to your fiduciary duty, it may be viewed as an offence in future should your company ever be made insolvent.
When Would My Limited Company Be Made Insolvent?
‘Insolvency’ is when the value of your company’s assets is less than the total debt it owes, or simply when a business cannot meet their debts.
Another instance where your company could be made insolvent is if it has received a ‘statutory demand’. This is a legal document that demands your company pay a creditor.
Insolvency is not only a procedure you instigate yourself. In certain cases, a court order can be passed to make your company bankrupt. This is known as compulsory liquidation or ‘Winding Up’.
Winding-up petitions are usually presented in the High Court by people who the Limited Company owes money to.
Striking off is a method of business dissolution suitable for those companies with no or very few assets. Unlike winding-up, it is not a formal insolvency procedure, and is not monitored by a liquidator or administrator.
Your Limited Company’s Budget
To avoid your limited company from getting to this stage, make sure you take all the necessary precautions when setting one up. Creating a budget is a good place to start.
When deciding on a budget, try to use a realistic time-frame. Usually anywhere between 3 to 12 months is fine, although it depends on your circumstances. You’ll also need to make sure that your employees PAYE has been accounted for, as well as VAT and corporation.
If you still have a net profit after all other outgoings have been taken into account, see if there’s a way you can put this towards your debts with creditors.
If you know a monthly profit isn’t likely, and your business debts are stacking up it might be time to seek debt help.
There are two options that allow your business to continue trading, the first of which is an informal negotiation, in which you make an offer to your creditors in instalments.
The second option for a limited company is to enter a CVA (Company Voluntary Arrangement).
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.