When you decide to go ‘limited’ as a small-business owner, you will have two options - limited company or limited liability partnership.
What is a limited company?
A limited company is available for individuals who want to utilise profit-making activities within a legal framework. Members or shareholders have their liability limited to contributions they have made or invested in the company, therefore, the debts of the company are separate from the shareholders’ debts.
What is a limited liability partnership?
This is made up of two or more people who agree to share a business and have equal power within the company. Each is required to register their partnership with Companies House. This partnership then becomes a company. The newly formed company can operate in a similar way to a limited company.
What are the differences?
- LTD: Only needs one member.
- LLP: Needs two people.
- LTD: Members’ liability is limited to the amount of money they choose to invest in shares.
- LLP: Partners’ liability is limited to the amount of capital agreed to be contributed by the partners.
3. Business investment
- LTD: Investors from outside the company may contribute loans or share capital and take an equity stake without being obliged to become a director of the company.
- LLP: Investors from outside the company can only contribute loan capital and cannot take an equity stake, only partners can.
- LTD: The shareholder's salary element is taxed with PAYE & NI and remaining profits are subject to corporation tax of 20%.
After this, the shareholders can then opt to pay dividends to themselves and - depending on their tax bracket - they will pay either a net 0% on these or 25% net if they are a higher-rate taxpayer.
The main benefit here is that they can choose not to pay out all of the profits and, therefore, defer tax liabilities to another tax year - which is not possible under a LLP.
- LLP: Individual members are taxed and, therefore, corporation tax won’t apply.
Capital Gains Tax
- LTD: This will be to the company and to the shareholders
- LLP: This is to the members and will only be applicable to the company in a case of insolvency.
Pay As You Earn:
- LTD: This affects the shareholders.
- LLP: This won’t affect members.
Tax treatment is always a big concern for many members of start-ups. Therefore, at this stage, you may be thinking what the best model would be for you in terms of tax. Thus, however much profit the company makes (and how much the owners pay themselves) will determine which model suits you best with regard to tax.
5. Make changes
Examples of such changes would be amendments to the capital structure or the transfer of shareholdings.
- LTD: It’s easy to make such changes
- LLP: Not as easy to make changes
This post was provided by 1st Contact Accounting. The information should serve as a general guideline.