Business structures – limited liability

‘Limited’ means that liability is limited to just the company. It takes a bit more work to set up such companies and there are greater legal restrictions and obligations, but there are benefits. As liability is limited to the company, the personal wealth and assets of its owners are, in most circumstances, safeguarded. It can also provide more credibility and confidence, especially to lenders and investors.

Limited liability partnership
A limited liability partnership is similar to a partnership except there is reduced personal liability – liability is limited to the amount invested in the business and any personal security used as guarantees. Members’ (or shareholders’) liability for debt is limited to the value of their shares, and the personal wealth of the members of the partnership is only at risk where they have acted negligently or fraudulently or have knowingly traded during insolvency. However, you may still have to put up personal security for bank loans, etc, when you are setting up, as it can be difficult to get finance at first. This is more easily changed when your company is established though.

To set up a limited liability partnership, you need to have at least two designated members who will be responsible for the accounts and for sending annual returns to Companies House. (Companies House is a government body whose purpose is to inspect and store company accounts and information and to administer the legislation relating to the Companies Act.) To apply, you’ll need to complete an Incorporation Document, LLP2, and send it to Companies House to register your company. There’s a £100 fee for doing so.

A limited liability partnership comes with increased responsibilities. You must have an audit of your accounts done by an accountant if you have sales of over £1 million. You must also file your accounts annually with Companies House using form LLP363 – known as doing your ‘annual returns’. This form will be sent to you every year and should be completed and returned with the relevant fee payment.

As with sole traders and partnerships, you will normally be considered self-employed and you will pay income tax rather than corporation tax on the profits you make, which will be divided among all the members (although members of limited liability partnerships can be companies as well as individuals, in which case they will be liable to pay corporation tax). If you have any employees, you will need to deduct income tax and National Insurance from them by means of a Pay As You Earn system.

Limited liability company
This type of company exists in its own right, i.e. it is separate from the personal finances and liability of the owner, and company directors are considered employees rather than self-employed. Profits are shared by means of dividends to shareholders/members. Again, these companies have to be registered (incorporated) at Companies House and there is a fee. To become a limited company you have to satisfy various requirements of the Companies Act, including informing Companies house of any changes in directorship or company secretary, keeping accounts and sending annual returns. Companies House provides lots of guidance on doing this. Again, you must have an audit of your accounts done by an accountant if you have sales of over £1 million. Shareholders aren’t liable for any debts (unless they have provided any personal guarantees) but stand to lose their investment should the company fail.

There are two types – private limited companies and public limited companies. Private limited companies are not able to sell public shares. They must have at least one director/member (shareholder). Public limited companies must have at least two directors/members as well as a company secretary and may sell shares to the public and on the stock market. Before a public limited company can begin trading, it must have issued shares to the minimum value of £50,000.

Cooperative
A cooperative is a company that is owned and controlled by its workforce and in which profits are shared and management decisions are made by ballot – i.e. it is run for the benefit of its members (the employees). All profits are shared by the workforce – any external party who has put capital into the business can only receive returns by way of interest on a loan. There are various different ways in which to set up a cooperative, such as setting up a partnership or limited liability company, but the nature of such structures is not in keeping with the principles of a cooperative, which should be fully owned by its workforce and should only be able to be sold in the interests of the employees. The only way to gain full cooperative status and full rights and control for the workforce is to set up as a cooperative society, an official and legally recognised body under the Industrial and Provident Societies Act, which has limited liability (members stand to lose only what they paid in as capital). You will need at least seven members in order to do so. Help and advice can be obtained from the Industrial Common Ownership Movement or Cooperatives UK, two bodies which aim to promote the democratic ownership and management of companies by their employees.

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