Accounting Made Ezy 2 – Limited Company, Director, Self Employed, Sole Trader – What Do They All Mean?

What is a Limited Company?

A limited company is a form of incorporation that limits the amount of liability undertaken by the company’s shareholders. It is owned by shareholders and run by a director (or directors) who is/are responsible for the operation and success of that company.

In the UK, any limited company must be incorporated at Companies House (https://www.gov.uk/government/organisations/companies-house).
This confers the status of being a separate legal entity from the people who run it, with a unique company registration number.

It is governed by the requirements of the Companies Act 2006 and its own articles of association. On an annual basis, the limited company must make returns of information to Companies House. That information is held on the public register, which is available for public viewing.

So how does a limited company work? In a limited company the assets and debts are separate from those of the shareholders. As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. This means that if a company goes bust, shareholders can only lose as much as their original investment and no more. Because of limited liability, investors are more eager to risk capital since their losses are limited in that sense.

Ownership in the limited company can be easily transferred, unlike a public company, in which anyone can buy shares. Membership in a limited company is governed by a company’s articles of association, and the law.

What is a Director?

The definition of a limited company director is the person who is legally responsible for the day to day management and running of the limited company. The director and the company are separate entities, they incur debts and pay bills in their own right. If you are a director of a limited company you are legally responsible for running the company and sending information to Companies House on time.

The responsibilities include:

  • Annual filing of accounts to Companies House
  • Maintain company records and reporting changes
  • Annual filing of Corporation Tax return to HMRC and paying and associated Corporation Tax
  • Completing and filling annual Confirmation Statement
  • Maintain a register of Persons with Significant Control
  • Informing other shareholders if you might personally benefit from a transaction the company makes
Accounting Made Ezy 2

What does Self-Employed mean?

Self-employed people work for themselves at a variety of trades, professions, and occupations rather than working for an employer. Someone can be both employed and self-employed at the same time, for example if they work for an employer during the day and run their own business in the evenings.

What is a Sole Trader?

A sole trader is a self-employed person who owns and runs their own business as an individual. A sole trader business doesn’t have any legal identity separate to its owner.

As a sole trader, you have complete control over your business, its assets and profits after tax. There are many advantages and disadvantages to being a sole trader. Unlike many other business, for a sole trader there’s no requirement to register the business with Companies House or make ongoing filings of information with them. There are no directors to run the business – just you, there are no shareholders to invest money. Instead, funding for your business is limited to what you can raise personally, there is no opportunity for multiple partners so the sole trader model is not usually suitable if you’re looking to go into business for someone else, i.e. seeking to share the responsibility and rewards.

But, a sole trader shares many characteristics with other business forms – including:

  • You still need to report and pay tax to HMRC
  • You need to manage a separate bank account for your business to your personal account
  • If you trade under a name other than your own name you must follow rules around naming your business
  • You must include your own name and the name of the business on business documents like invoices, letters and receipts
  • You can employ staff
  • You bear all responsibility for the business

At Ezyco we support all of the individuals listed above, our product range is designed for comprehensive, tailored accountancy based on your working lifestyle.

If you’d like to know more, have questions, or if we’ve inspired you enough to take the leap into one of the above working practices please do get in touch.

We’d love to help you on your journey.

Accounting Made Ezy 2

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