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The main forms of legal entities in the United Kingdom are Private Limited Company (LTD) and Companies Limited by Guarantee. There are also 3 other alternatives for legal forms of business (Sole trader, Partnership and Limited Liability Partnership), but each has different tax and liability implications for owners and shareholders.
The following legal forms of legal entities exist in the United Kingdom:
The most common form of business in the United Kingdom is a Private Limited Company by Shares. An LTD cannot be created without at least one shareholder. Additionally, it should also have at least one director, who may be the same as the shareholder.
The initial share capital is usually less that GBP 100, and there is no minimum capital requirement (other than the requirement that at least one share be issued upon incorporation). Small and medium-sized private companies have the option of submitting modified (i.e., simplified) accounts at Companies House, rather than full accounts.
Companies Limited by Guarantee require at least one guarantor and a ‘guaranteed amount’.
Guarantors can be company members who play an important role in the company by controlling the organization and making critical decisions. They typically do not take profit from the company; instead, the funds are retained by the company or are put to other purposes.
Guarantors make a promise of an agreed amount of money to the company if it fails to pay its debts. This is referred to as a ‘guaranteed amount’. The full amount of their guarantee must be paid to the company.
This payment covers guarantors for situations such as the company being closed down. The guaranteed amount is not linked to how much the company is worth – you choose how much they pay.
In the United Kingdom, there are 3 basic business structure types, and each has different tax and liability implications for owners and shareholders:
If you’re a sole trader, you are an individual that is self-employed and runs your own company. All business profits are yours to keep after taxes have been paid on them. You’re fully responsible for any losses your company makes. You must also stick to certain rules when operating and naming your business.
In a partnership, you and your partner (or partners) each share responsibility for your business.
This includes:
Each partner pays taxes on their share of the business’s income, which is divided between them. However, a partner does not have to be an actual person. An example of a ‘legal person’ that can also be a partner is a limited company.
A Limited Liability Partnership (LLP) can be set up (or incorporated) to manage a business with 2 or more members. A member can be a person or a company, known as a ‘corporate member’. As in an ‘ordinary’ business partnership, each member pays taxes on their share of the profits but is not personally accountable for any debts that the company is unable to pay.
The most common legal form in use for running a business is the Limited Company. Companies are ‘incorporated’ to create an organisation with a separate legal personality. This indicates that the organisation is able to run business and enter into contracts under its own name. When registering under the Companies Act 2006, a company must have two constitutional documents:
The Memorandum, which outlines the fact that the original members (subscribers) desire to establish a corporation and consent to become its members. The Memorandum cannot be amended; and
and Articles of Association, also known as the Articles, which serve as a kind of contract between the company and its members. The Articles establish the company’s legally binding rules, including the framework for decisions, ownership and control. According to the Companies Act 2006, a company can draw up its articles to suit the specific needs of the the same company, provided it acts within the law.
A Limited Company is owned by its members, those who made investments in the business, and as the name implies they enjoy limited liability. That means, that the company’s finances are separate from the personal finances of their owners and typically, creditors of the business may only pursue the company’s assets to settle a debt. The owners’ private property is not at risk.
There are two mechanisms for company membership:
Company Limited by Shares – almost all companies fit into this category. Members of such organisation are referred to as shareholders since each one of them owns one or more shares in the company. Shareholders’ limited liability means that they may only lose the money they have already invested or promised to invest (amounts unpaid on shares).
Members of the Company Limited by Guarantee give a guarantee to pay a set amount if the company should go into liquidation.
Online registration for a Limited Company can take as little as 24 hours.
Due to the nature of the UK Limited Company, it should have one director and one shareholder (who can be the same individual) who are both at least 16 years old and liable for all company obligations. Additionally, the company needs to have a UK registered office address. These are the basic requirements that must be met in order for a foreign resident to register a UK company.
Since an offshore company is one that is not incorporated in the United Kingdom, it is not permitted to own a UK company even though it is permitted to operate within the UK and create subsidiaries in the UK. You can separately register a company as a non-British national if you own an offshore company.
| Financial year 2020 to 2021 |
Financial year 2021 to 2022 |
Financial year 2022 to 2023 |
Financial year 2023 to 2024 |
|
| Main rate | 19% | 19% | 19% | 25% |
| Small profits rate | n/a | n/a | n/a | 19% |
| Lower threshold |
n/a | n/a | n/a | GBP 50,000 |
| Upper threshold |
n/a | n/a | n/a | GBP 250,000 |
Corporate Income Tax is paid on profits from doing such business as:
In the United Kingdom, the tax period is the accounting period. The deadline for tax return filing is 12 months after the end of the accounting period.
In the United Kingdom, investment incentives in the form of tax reliefs are provided to stimulate investment by increasing income from it or reducing its costs. Moreover, attractive venture capital schemes are offered to assist small and medium enterprises with their growth plans. The Enterprise Investment Scheme and the Venture Capital Trusts offer tax relief for individuals interested in investing in the UK small businesses.
To promote fast-growing, innovative services and products, companies investing in research and development in the United Kingdom may benefit from the R&D Expenditure Tax Credit.
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