A limited company is what a lawyer calls “a creature of statute”. Simply, it exists within a strict legal framework. If you want to create, operate, or close a limited company, then you have to comply with all the legal requirements.
The “limited” means that the liability of the owners of the company is limited. Here is an example:
Suppose three people each put £x into a new company to start a new business. The business trades profitably for 5 years. The profits are paid to the shareholders as dividends (and directors’ fees). The company makes a loss and is unable to pay its debts. The directors have not behaved unlawfully. In these circumstances, ordinary creditors of the company cannot claim more than the value of what is in the company that is the money value of its assets, when sold by a liquidator.
Of course if the company goes bust most creditors more than likely receive nothing. This is the single biggest attraction of operating a business through a limited company.
A company is a person in law - a company is a “body corporate”. The law treats a limited company as if it was a separate person - like you or me. Through it’s directors, a limited company can thus make contracts to employ people, or to buy and sell goods. It can open a bank account, buy property, and generally perform economic functions in just the same way as a private individual.
Duties of directors - directors have specific obligations. A director must not prefer his own interest to that of the limited company in the affairs of the company. He must not do anything in the limited company that is intended or likely to reduce the value of the company’s business or assets. He must comply with legal requirements to file an annual return with the Registrar of Companies, and to produce accounts and file those too (complexity depends on size of company).
Directors careless or negligent - contrary to popular opinion, in practice directors behave much as they like. Regulatory requirements for filing annual returns and accounts are policed with a light hand. If a director fails to perform his duties properly, a creditor, a shareholder, an employee, or another director who has suffered financial loss might take legal action against the director or the limited company. But if no dispute arises, there is some flexibility in the system.
Taxation
Companies pay Corporation Tax, not Income Tax. There is a massive amount of legislation
Regulating this. Today, the rate of Corporation Tax is such that most businesses will pay
Less tax as a company than the director - shareholders would pay as individuals.
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