If you are an international business person with plans to establish a new business, you may be unsure which country will give you the best platform for commercial success. Two of the most popular countries for international entrepreneurs are the United States (US) and the United Kingdom (UK). In the US, the most commonly established business type is a Limited Liability Company (LLC), while in the UK, most entrepreneurs opt for a Limited Company (LTD).
While there are many similarities between LLCs and LTD companies, there are some important differences to be aware of. In this article, we will explain everything that you need to know about how UK LTDs and US LLCs compare.
Key features of a UK limited company (LTD)
The UK limited company (LTD) is the most commonly used company structure in the UK due to its ease of set-up, taxation, and minimal personal liability. Many business people choose the UK LTD business structure because the personal liability if the company fails or gets into debt is limited to the nominal value of their shares or ‘guaranteed amount’.
UK limited companies are run by directors, owned by members/shareholders, and are legal entities in their own right. Limited companies can be established and run by a single person who is both a shareholder and director or multiple individuals with differing roles within the company. They must be registered with and incorporated by Companies House, whose role is to keep the official register of companies in the UK.
Advantages of a UK LTD
There are several advantages of a UK LTD:
- Limited personal financial liability for directors and members.
- Distinct legal identity – allows the company to enter into contracts in its own right.
- Inexpensive and quick to establish – a limited company can be set up using our easy online company formation service at an affordable rate.
- Tax efficiency – owners can split their income between salary and dividends to achieve maximum tax efficiency. There are also certain HMRC tax allowances to encourage growth and investment, such as the annual investment allowance (AIA).
- Credibility – customers, suppliers and investors view limited companies as more professional, trustworthy and stable compared to UK sole traders.
- Protected company name – limited companies cannot use an existing company name, providing brand protection.
Disadvantages of a UK LTD
Limited companies in the UK also have some disadvantages, as follows:
- Anyone who is an undischarged bankrupt or has been previously disqualified as a director cannot set up a UK-limited company.
- Restrictions on company names – Companies House imposes certain restrictions on company names.
- Public disclosure – your company information and some of your personal details will go on the public register and be visible to all.
- More administration – limited companies are required to meet strict administration, record keeping and reporting requirements, including filing an annual confirmation statement and accounts.
- Transparency – you must ensure that certain registers and records are available for physical inspection at your registered office at all times.
Key features of a US Limited Liability Company (LLC)
A limited liability company (LLC) is the most commonly used business structure in the United States for small businesses and those with minimal capital and investment requirements. LLCs are not registered with a single central registration body but rather by the Secretary of State’s office in the relevant state.
LLCs do not have shares or shareholders like UK limited companies; instead, owners hold a certain percentage of the company or ‘membership units’. Owners (members) of LLCs also have limited liability from the debts of the business and can be individuals, corporations, other LLCs, or overseas entities and enterprises. LLCs can have a single owner (permitted in most US states), and there is no upper limit on the number of LLC members.
From a taxation standpoint, LLCs can choose not to pay taxes on profits directly. Instead, any profit or losses made by the LLC are ‘passed through’ to its members. Those members then report the profits or losses within their personal IRD tax returns. Alternatively, the LLC can be registered as a corporation for tax purposes. It is important to bear in mind that according to US state law, an LLC is not technically a corporation, but it does have some features of a corporation. As such, it can be seen as a hybrid of a corporation and a partnership or sole proprietorship. The laws and regulations governing LLCs also vary from state to state.
Advantages of a US LLC
The main pros of a US LLC are as follows:
- Limited personal liability – owners/members of LLCs have limited personal liability from the debts and liabilities of the company. As such, their personal assets are protected from any potential lawsuits against the company.
- Flexible – there is no mandated management structure, so owners can decide how they structure the LLC
- No limits on the number of members
- Members can include individuals, partnerships, trusts, corporations or companies
- Pass-through taxation – LLC owners can “pass-through” any profit or loss made by the LLC, which they then record on their personal income tax returns. This means that the LLC may not pay tax directly to IRD.
- Ease of formation – LLCs are normally very quick and easy to form; however, the exact process differs from state to state.
- Reduced administration – running an LLC requires less paperwork than a corporation. In addition, LLCs tend to have fewer compliance requirements compared to other business models.
- Adds to credibility – LLCs signal greater credibility to customers, suppliers and investors.
- Increased privacy – there is no requirement for owners of LLCs to have their personal details (i.e. name and address) placed on the public record.
Disadvantages of a US LLC
Setting up an LLC in the United States also has its disadvantages, as follows:
- Higher set-up and running costs – LLCs tend to cost more to set up and run than Sole Proprietorships and General Partnerships
- Difficulty of transfer – in some cases, it can be more complex to transfer ownership of an LLP than to a corporation because all members are required to agree to changes in membership.
- Complexity of tax filing – it may be necessary to file multiple tax returns depending on where the LLC operates. In addition, LLCs taxed as Corporations may have double taxation.
Which is best: UK LTD or US LLC?
There is no ‘best’ model. It is important to find the best business structure for your unique business needs. The option you choose will depend on a range of factors, including the location of your target market and your need for operational flexibility.
In general, LLCs offer higher levels of flexibility because they combine the ease of change of a partnership with the protection of a corporation. On the other hand, while LTDs are less flexible due to their greater level of regulation, this provides greater credibility.
Let’s compare the key features of a UK LTD with a US LLC:
| US LLC | UK LTD | |
|---|---|---|
| Ease of set-up | Easy to set-up but the process varies from state to state | More formalities when setting up yourself. However, the set-up process is simple and efficient if a company formation specialist such as Uniwide Formations is used. |
| Taxation | Benefits from ‘pass-through’ taxation, which means the LLC does not pay tax directly. Rather, profits and losses are passed on to the members. Tax can be more complex in the US | Taxable as a corporation. The tax system in the UK is relatively straightforward, but all companies are subject to a corporation tax of 25% on profits. |
| Ease of business banking | More competition, and it is easier for non-residents to open an account. | Less competition, and harder for non-residents to open an account. |
| Personal privacy | Some states allow LLC owners to keep their personal details private | Companies House makes the details of LTD owners public |
| Limited liability | Provides some limited liability but is less secure against creditors | More secure against creditors |
| Compliance requirements | Fewer legal compliance requirements | Stricter compliance requirements |
| Flexibility | More flexible. Easier to make changes to the business without filing paperwork | Less flexible. Subject to stricter controls and reporting requirements for business changes |
| Ownership | Owners or members have membership units or LLC interest | Owners or members have a shareholding |
In general terms, if you are looking for a business structure within Europe that offers robust levels of personal protection for your assets, then setting up an LTD in the UK will be the way to go. However, if you are looking to do business predominantly in the US and worldwide and you want to prioritise flexibility and growth, consider an LLC.
Final words
LLCs and LTDs are among the most popular and commonly established business types and have been used to create some of the most commercially successful enterprises in the world. Both have similarities, but the type of ownership and method of taxation is markedly different. Before making the final decision, we recommend speaking to an accountant who is familiar with international business regarding your business plans. Based on your immediate, medium, and long-term goals, they will be able to advise you on which is the most suitable business structure for your needs.
