fbpx

Limited Company Terminology

Some of the terminology involved when you trade through a company can be confusing.  Here are some common terms and concepts:

  • Registered Office – this is where official tax papers and Companies House papers are sent and is normally your home or your accountants office. We offer a free registered office service to our clients.
  • Accounting Reference Date – this is the company’s year end, although the first “year” may be more or less than 365 days.  A year end of 31 March annually is the simplest to use as it ties in with the tax year.
  • Directors – these are the individuals responsible for running the company, and there must be at least one.  A director is responsible for running the company on the shareholders’ behalf, and also has legal responsibilities for making sure the company does not trade whilst insolvent, pays its taxes and files returns and accounts at Companies House and HMRC.
  • Company Secretary – it’s no longer compulsory to have a secretary, although some people still do.  The company secretary is an administrative role with less responsibility than a director.
  • Issued Share Capital – the issued share capital is the number of shares issued – normally 100.   The size of the issued capital is more important as it defines the flexibility for nominating share holdings  – eg if two shares are in issue then the only option is two shareholders with 50% each, or one shareholder with 100%, whereas if 100 shares are in issue then there are permutations so one shareholder could have 25 shares and another 75 shares, making 25% v 75% ownership.  Do be clear on the difference between the number of shares and the percentages – eg if there are two shares issued and you own one share, you have 50% control, the same as if there were 100 shares issued and you owned 50 of them.
  • Authorised Share Capital – this is no longer required for most private companies under Company Law.  It used to be a cap on the maximum number of shares that could be issued, but was abolished as for most small businesses it served no purpose.
  • Shareholders – these are the owners of the issued shares.  Shares can, in theory, be put into the names of family members, but there are pitfalls here, and the situation needs to be reviewed on a case by case basis.   The shareholders and directors are often the same people in a small company, but they are separate roles – shareholders own the shares, directors direct the business.  It is entirely possible to have shareholders who are not directors, and directors who are not shareholders.
  • Memorandum and Articles of Association – these represent the companies constitution.  Almost all Companies use Companies Act standard Memorandum and Articles, although bespoke ones can be adopted, for example, if you need restricted voting rights, are creating a non profit, etc.
  • Private Limited Company v Public Limited Company – Private Limited Companies (Ltd) and Public Limited Companies (PLCs) differ in that a PLC can offer shares to the public, eg by a public share issue.  A Private Limited Company cannot offer its share for public sale, and shares can only be sold privately.  In practice this means a PLC can be listed on a Stock Exchange or Market, or can advertise shares for sale; a Private Limited Company cannot advertise shares for sale publicly.  Most companies are Private Limited Companies, and certainly a small companies.  As PLCs can can offer shares for sale publicly there are more onerous governance requirements to protect the public interest.
  • Person With Significant Control – PSCs are the people who control a company, normally the majority shareholders, but possibly directors as well.  Details of PSCs must be filed at Companies House, and kept updated. See Maintaining a Register of People with Significant Control.  Note – don’t confuse Person with Significant Control and Personal Service Company – both are abbreviated to “PSC” put they are different.
  • Confirmation Statement (CS01) – an annual return to Companies House confirming PSCs, Directors, Registered Office address and similar.  It is not a financial statement, and contains no accounting or tax information.
  • CT600 – the annual Corporation Tax return to HMRC.  It is accompanied by accounts in a special readable format called iXbrl.  Your accountant will produce these.
  • Personal Service Company – although not defined in law, a Personal Service Company is a company which mainly provides the services of one person.  Its relevance comes with tax legislation called IR35 which applies where there is “disguised employment”.  Read more about Personal Service Companies in the tailored section of our website Index to our PSC Guidance
  • Umbrella Company – an alternative structure to a Personal Service Company for those in contracting roles.  Beyond the scope of this guide, except to say unlikely to be applicable in a general trading situation.
  • Salary v Dividend – this comes up in the context of profit extraction from a Limited Company.  Directors are considered employees of the company, and alongside any other employees, receive salary for their efforts.  Dividends are paid to shareholders as a return on their investment.  As Directors and Shareholders are normally one and the same with a small company, the Salary v Dividend mix is optimised for tax and commercial benefit.