If you’re looking to register a company, you’re spoilt for choice when it comes to the structures available to you, especially if you don’t need to reside in the location where the company is formed.
In this article, we are going to compare two of the most well-known corporate structures in the world, an LTD (which, for the purposes of this blog, refers to a private company limited by shares registered in the United Kingdom) and an LLC (a Limited Liability Company registered in the United States of America). We’ll cover all the need-to-know information, including the owners’ liability, tax considerations, the formation process, and more. Let’s get started.
LTDs: The basics
Alongside sole traderships, LTDs are the most popular business structure in the UK (and the most popular type of company). To form a company, you must register it with Companies House, the UK’s registrar of companies.
An LTD is run by its directors and owned by its shareholders (who are also known as members). One person can form and operate a company, acting as both a shareholder and director. Alternatively, a company can be formed and run by multiple people taking up different positions.
The cost of starting up an LTD depends on the method you use. It is possible to register online directly with Companies House, which charges £50. However, their registration service is basic, may not be suitable for all companies, and does not provide any additional services.
In comparison, a company formation agent such as 1st Formations can form the company for as little as £52.99, and includes a full set of company documents and share certificates. Also, a full range of additional services such as a Registered Office Address Service and Confirmation Statement Service are available at an extra charge.
Accountants will often also provide company formation services, with costs varying from around £250 to £500 depending on the level of service provided.
Once applications are sent to Companies House, companies can be formed within 24 hours.
LLCs: The basics
LLCs are one of the most popular business structures in the US. Unlike the UK, where companies are overseen by Companies House, LLCs are usually registered and regulated by the Secretary of State for the state in which they are being formed. This means some details regarding the setting up and running of the company will differ from state to state.
An LLC is owned by its members, who are generally also the ones who run the LLC on a day-to-day basis. This can be just one person (in which case the company is known as a single-member LLC) or multiple people (a multiple-member LLC).
The cost of starting an LLC depends on the state where the company is being registered and whether it is formed directly with the Secretary of State or through an agent or an accountant. According to Investopedia the average cost to form an LLC is $129.
The time it takes to register a limited liability company depends on the state where it’s being formed, but generally speaking, this generally takes a few weeks.
LTDs vs LLCs: Limited liability
LTDs and LLCs share several similarities. The major attribute they both possess is also the main advantage of each structure: limited liability. This means the company owners receive a level of financial protection and are not normally liable for the company’s debt if it runs into financial trouble.
The owners of a UK LTD are only liable for the unpaid value of the issue price of the shares they possess (the issue price is normally just the nominal value of the shares, which can be as little as £1 or less). If they have already paid for their shares, they will usually have no further liability if the company accrues debt.
The owners of a US LLC similarly benefit from the protection of limited liability and are generally not liable for any sum if the company accrues debts or gets sued.
LTDs vs LLCs: Ownership
As mentioned earlier, an LTD is owned by its shareholders (who are called members). In general terms, each shareholder’s ownership of a company is determined by the proportion of shares they hold. For example, if the company has just one shareholder, that individual will own 100% of the company. If it has two shareholders, with 1 share each, they own 50% each. If it has three shareholders, with shareholders A and B having 1 share each, and shareholder C having 2 shares, the split would be 25%/25%/50%.
Details relating to the shareholders are recorded in the company’s register of members. They are also provided to Companies House at incorporation and are updated throughout the company’s life through the filing of the annual confirmation statement.
By contrast, LLCs do not have a share capital, which means they do not issue shares to the owner(s). Instead, each owner holds a stake in the company that is expressed through a membership interest (and so are called “members”). This membership interest can be shown as a percentage or as units. The absence of shares presents a challenge when transferring ownership from one individual to another; indeed, in many LLCs, the changing of its members requires unanimous approval.
This information is recorded in the LLC’s operating agreement, and in some states, it may also be submitted to and made available to view by the Secretary of State for the state in which the LLC is incorporated.
LTDs vs LLCs: Paying tax
LTDs are required to pay tax on their profits through Corporation Tax. This is currently set at a main rate of 25% (although special rates and reliefs do exist for smaller companies).
Because the company and the people involved are distinct legal entities, the owners are not personally liable for this tax – the company is. Having said that, when dividends are paid to the shareholders (dividends being the method through which shareholders are financially rewarded for their ownership), the shareholders are subject to Dividend Tax. This tax is paid by the shareholder, not the company.
In contrast, LLCs are not normally taxed at the entity level. Tax is instead paid at the individual member level, with each member paying tax on their share of the business’ profits. For this reason, limited liability companies are often referred to as ‘pass-through entities’ insofar as the tax liability “passes through” to the individual. That said, an LLC must still complete and submit certain tax forms to the Internal Revenue Service (IRS), except if it is a single-member LLC.
The taxes that an LLC member pays can be complex, as they depend on the number of people in the company and the state in which the company was registered.
LTDs vs LLCs: The public register
Once an LTD is registered, certain information about the company and the people within it is placed on the Companies House register.
This includes basic company information, such as the name, registered office address, and business activity, as well as information about the directors, shareholders, and people with significant control (including names, dates of birth, and service addresses). Then, once the company starts filing annual accounts, this financial information is also made publicly available.
Whilst residential addresses can be published on the register if used as the registered office or service address, this can be prevented by using a Registered Office Address and Service Address.
When it comes to LLCs, the information that is made publicly available depends on the state in which they are formed. In some states, information similar to that of an LTD, as outlined above, is published. In others, notably Delaware, Nevada, New Mexico, and Wyoming, you can form an LLC while remaining anonymous.
Whilst LLC financial information doesn’t always need to be made publicly available, it’s normal to share this with government entities, potential creditors, and investors.
LTDs vs LLCs: The company formation process
Forming an LTD
To set up an LTD, you will need to provide the below information on a version of the ‘IN01: Application to register a company’ form (although if forming online, as most people now do, this official name is unlikely to be referenced):
- A unique company name – this cannot be the same as any other on the Companies House register
- Business activity description – this is done by selecting between 1 and 4 4 Standard Industrial Classification or SIC codes
- Registered office address – this is the official address for the company and where official documentation will be delivered
- Director details – including date of birth, nationality, occupation, service address, and residential address
- Shareholder details – including date of birth, nationality, occupation, service address, and residential address
- Share details – including total held by each shareholder, currency, nominal value, paid-up amounts, and particulars associated with the shares
- People with significant control details – including date of birth, nationality, occupation, service address, residential address, and the nature of their control (for example, they hold more than 25% of shares in the company)
- Articles of association – this document is attached to the incorporation application. It is the principal governing document of the company, determining how it is to be run. If you are using 1st Formations to register your company, we will provide you with an appropriate set of articles of association to form your company.
Once the information has been submitted, the company can be formed within 24 hours.
Once formed you will receive a certificate of incorporation. Plus, if you use 1st Formations to register, you will also receive copies of the company’s memorandum and articles of association, a company register with completed first entries, and share certificates.
For a more in-depth look at the 1st Formations process, please read ‘How to register a company in 4 simple steps with 1st Formations’ or watch this video demonstration.
Forming a LLC
The exact process to set up an LLC differs depending on the state. Generally, it entails providing the below information on a version of the state’s ‘Articles of Organization’ (online or offline):
- A unique company name – this cannot be the same as any other in the state you are registering
- Registered agent details – this is the person who will receive official company documentation and must be located at an address within the formation state
- The principal place of business address – this is where the company will operate from
- The reason the company is being formed – this is provided with a written statement of business purpose
- Information on how the company will be managed – you need to clarify how your LLC will be managed – some LLCs are member-managed (run by the owners) and others are manager-managed (when control is delegated by members to a designated manager)
- Signatures of the LLC members
Whilst not always needed, some states also require an operating agreement to be filed (for example, California, New York and Delaware). This document is similar to an LTD’s articles of association, in that it details the LLC’s decision-making process, as well as how it is to be managed and structured. It also sets the framework for how profits will be distributed among members. Even if an operating agreement isn’t compulsory, creating one is still a good idea.
When the information has been submitted, LLCs are normally formed within a few weeks, depending on the registration state.
LTDs vs LLCs: Post-company formation
Once an LTD or LLC has been registered, there are a number of ongoing obligations necessary to keep the company compliant.
As an LTD you must, amongst other things:
- Register for Corporation Tax within 3 months of business activity starting
- File an annual confirmation statement and update Companies House regarding certain changes to your company (for example, a change of registered office address)
- File annual accounts (or dormant company accounts for non-trading companies)
- Register for PAYE if the company is employing people
- Register for VAT if the annual turnover exceeds £90,000
As an LLC, you may need to (depending on the formation state):
- File an annual report
- Pay an annual filing fee
- Pay franchise tax
- Apply for an Employer Identification Number (EIN) if the company is employing people
LTDs vs LLCs: To wrap up
You may be wondering which of the two structures is best for you. As you would expect, both have strengths and weaknesses.
An LTD is easy to set up (and inexpensive), provides rigorous financial protection, tax efficiency, and, thanks to being so well established, business credibility that few other structures can offer. However, running an LTD compliantly requires some administration, and the post-formation duties can be a distraction from doing business.
LLCs also provide a level of financial protection, plus they are more flexible regarding how they are managed and owned. However, because each US state has different rules and regulations, it’s easy to get tripped up by your obligations. Moreover, transferring LLC ownership can be tricky because they have no share capital.
Of course, what’s right for you and your business depends on your own circumstances.
So there you have it… ready to start your company?
If you have decided that an LTD represents the best path to business ownership for you, we can help. We offer a range of company formation packages, including a Non-Residents Package that’s perfect if you don’t live in the UK.
We can take care of your company formation and help with distracting administration tasks, such as filing your confirmation statement, registering for PAYE, correctly appointing new directors, and more. Take a look at what’s included in each package to find the one that’s right for you.
Browse our company formation packages now – prices start at only £52.99
Thanks for taking the time to read this post. We hope you have found it helpful. Please leave a comment if you have any questions.
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