Updated 03 December 2020
When choosing a structure for your business, you’ll come across the terms ‘private limited company’ (Ltd), ‘public limited company’ (Plc), ‘limited liability partnership’ (LLP) and perhaps even ‘limited liability company’ (LLC). What do these terms mean, and what are the key differences between these types of business?
Here you can find out about the various forms of limited liability, the advantages and disadvantages of each kind, and how to get set up in your preferred structure.
In business, limited liability is about reducing your personal exposure to financial risk. If your business fails (or is sued) then the amount of money for which you are liable is limited by the business structure. There are a number of different forms that this ‘safety net’ can take. Here is how each kind works.
The most popular form of limited liability – indeed, the most popular business structure in the UK – is the private limited company (Ltd). Once created, the company is a separate legal entity with finances that are separate from yours. This means that, in the event of liquidation or litigation, the most you can be liable for personally is the face value of your share in the business. Any further liability must be paid out of the company's assets. Any private assets you have will (usually) be safe. All limited companies must be registered at Companies House.
The main reasons for choosing a limited company structure include:
Possible disadvantages of the limited company structure include:
To set up a limited company, you'll need to register it with Companies House. However, there are several steps you'll need to take before that, such as choosing a name and a registered address, deciding how many directors you will have (it can be just you), and obtaining a standard industrial classification of economic activities (SIC) code to identify what your company does. You'll also have to register for corporation tax.
For more details about what you'll have to do, see our guide to setting up a company.
You may have come across the term LLC (limited liability company). This is a US business structure that is essentially the same as a private limited company. LLC does not exist as a separate structure in the UK.
A public limited company (Plc) is similar in most respects to a private limited company. The main differences are:
Usually your company will be a private limited company (Ltd) before it ever gets to be a public limited company (Plc), so you will already be familiar with most of the advantages and responsibilities. The main additional advantage is being able to raise more capital from trading shares, while the main downside is the additional scrutiny the company will face.
A limited liability partnership (LLP) works in a similar way to an ordinary partnership, except that the partners are not liable for each other’s actions. Members of an ordinary partnership have ‘joint and several responsibility’, which means that if one partner is sued (e.g. for negligence) then all partners might have to pay damages. By contrast, in an LLP there may only be ‘joint’ liability, so although the LLP itself may be held liable, the individual partners cannot lose more than they have invested in the LLP (except in cases of fraud or wrongful trading).
Like a limited company, an LLP is a separate legal entity in the UK, and must be registered at Companies House. There must be at least two ‘designated members’ who perform the necessary administrative duties.
A partnership may decide to convert to an LLP when it grows beyond a certain number of partners, to reduce the risk to its members.
The main reasons for choosing an LLP structure include:
Reasons you might not choose an LLP structure include:
Another point to bear in mind is that an LLP does not itself pay tax. Instead, each partner submits an individual tax return on their share of the profits. Ask your accountant whether this would be an advantage or a disadvantage for you.
As the name suggests, unlimited liability mean there is no limit to the amount of money for which you can be liable. Unlimited liability applies to sole traders and to the partners in ordinary partnerships. This means that if the business become insolvent, or is sued, then you are fully liable for all debts and/or damages to be paid. This is why larger businesses nearly always prefer a structure that gives them limited liability.
Before setting up your business structure, talk to your accountant about limited liability to decide which form would be best for you.
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