It’s very likely that you will setup your first business as a sole trader, which indicates that you are basically self-employed. But after trading for several years, it is only logical to create a private limited company, especially since you should probably now have the financial resources to do so. The formation of a limited company (Ltd) is quite straightforward; however, you must also be aware how your legal position, financial arrangements and other responsibilities will change dramatically from when you were a sole trader.
Small business owners, contractors and freelancers can benefit much from creating their own limited company. In this article, you will learn all about limited company formation plus additional information on how to run this type of business. If you’re confused about the potential benefits and implications of starting a limited company, this guide is for you. This article will enlighten you on how a limited company can save you time and money, and will show you how to setup a limited company online.
What is a Limited Company?
The term “limited company” refers to a business organization that’s considered as a separate entity (legally and financially) from the individual(s) managing this business organization (e.g. the company’s board of directors). The reason why this kind of business structure was created is to allow business owners to have limited liability. By contrast, when you register your company as a sole trader, when your company is sued for whatever reason, it is you who will take the bulk of the responsibility of that lawsuit and nothing will be protected from the government seizing even your personal assets when you lost the case.
On the other hand, if your business is a limited company, you are only liable for the face value of your share in the business and the judge cannot order for your personal assets to be siezed as it is not part of the company. A limited company has one or more directors (having more than 2 directors are called board of directors), may have one or more bank accounts, has its own tax designation by the HMRC, can be auctioned or sold as an IPO (initial public offer) company shares, and is required to be registered with Companies House.
Why Set up a Limited Company?
Most of the benefits of setting up a limited company is already mentioned above and the last advantage of having a limited company is that it allows you to pay a lower tax rate compared to a sole trader company. This means you will save more money for other company projects, or pay out dividends to your shareholders.
When Should I Change from Sole Trader to Limited Company?
Creating a sole trader business has its own pros and cons (usually it has lesser pros and more cons) like testing how your business model will work against the real world market and refine it. Among the benefits of being a sole trader includes no registration fees, little to no administration work, and you can make decisions without having to consult with your board of directors or shareholders. Meanwhile, the cons include sole trader tax is categorized as income tax and not corporation tax, which means its a higher tax rate than corporate tax, plus all business debts is your personal responsibility (meaning you have full liability).
Therefore, it makes more sense to form a private limited company instead of keeping your sole trader business, as your revenue grows.
One advantage that forming a limited company is that you can find more ways to finance your business. As a limited company you can get private equity funding (i.e. selling shares in your business), whereas a sole trader business can only get business loans from bank. Also being a limited company you can do either or both.
Can I Set Up a Limited Company on My Own?
Companies House allows individuals to set up their own private limited company even if they’re the only employee and director of their company. This is a safe bet for contractors because it limits the risk of their clients treating them as regular employees and find loopholes in their tax and legal obligations. It also keeps contractors safe from the legal ramifications if and when they are sued by their clients. Contractors can also outsource their company administration to an umbrella company in order to save time, energy and resources.
The 7 Steps to Setting Up a Limited Company
Below are the steps you need to take in forming your private limited company.
1.) Check it’s right for you
Decide which business structure suites you best, limited company or sole trader?
2.) Choose your company name
The company name you’ll chose for your limited company will be your company’s legal business name, therefore it must be unique and must bear no resemblance to other existing company names. Your company name must not make false implications (i.e. imply regulation or approval by a body where none exists) and must not contain any offensive words. You can also operate your business under a different name; however, you cannot include the suffix “Ltd” to this name if your business was not registered under this name.
3.) Appoint at least one director
Your limited company can have at least one company director (which can be you, typically), but it can also have more than one director. The job of the company director or board of directors is to vote on making important decisions for the company, follow their rules set prior to the launching of the business and filling the company accounts, as well as ensure that corporation tax are properly remitted to the HMRC.
Though not required, you may appoint a company secretary. The company secretary would be the enforcer of the board of directors and he or she ensures that their decisions are carried out all over the different departments. He or she also makes certain that the company adheres to regulatory requirements and does all other administrative tasks.
4.) Decide who will be shareholders
Your company shareholders are those individuals who have financially contributed to the formation of your company. As the business owner you can be the founder, CEO and shareholder of your company. Another type of shareholders are the people who have purchased a significant amount of company shares that were offered as IPOs (initial public offer). Those that have huge percentage of the company shares becomes one of the company board of directors. A shareholder with more than 25% of the shares is a “person of significant control” (PSC) and will usually have the strongest voting power in the board. Some companies who have made well for themselves only sells less than 40% of their shares, thereby giving them the controlling interest of the company whenever the board of directors meet to vote on any crucial company decision.
5.) Create your company documents
Your limited company is required by the UK’s Companies House to have legal company formation documents that indicates how it should be operated. These are:
The memorandum of association
This is a legal statement saying that all initial shareholders have agreed in writing their will to form the company together as a group.
The articles of association
These documents lists all the company rules and regulations and how it should be operated, which is signed by shareholders, directors and company secretary. If this is your first time forming a company, you can find examples of articles of association and use that as a guide to create your own.
6.) Confirm what records you need to keep
Records keeping is also one of the requirements in company formation, which may include the company’s PCSs and all of its accounting records. Records must be kept for at least 6 years.
7.) Register with Companies House
The last step involves registering your company at Companies House (be sure to include your physical address when you do). Select the appropriate SIC code, as this specifies the nature of your business. Save time and effort by registering for corporation tax the same day.
How to Register a Limited Company
Go to the website of Companies House and fill up the company formation form, or you can also use the form IN01 and register by post. Should you decide to not use “limited” in your company name, then you must register by post. Typically, your new limited company will be registered within 24 hours after receiving your application (if done online). It can take up to 10 days for postal registrations to complete.
A 10-digit Unique Taxpayer Reference (UTR) will be mailed to the physical address of your company within a couple of days after your company has been registered. Your UTR is important, so keep it safe. The Companies House will also send you a ‘certificate of incorporation’, which confirms that your company is now in their records and that it legally exists. This document also includes the company number and date of formation.
How Much Does it Cost to Register a Company?
It’s very cheap to register your company online, just £12. It cost £40 for postal registration; however, Companies House has a a same-day postal registration option for £100, if you want your company formation to be fast-tracked.
What Taxes Will My Company Pay?
The UK government requires all limited company to pay corporation tax based on their fiscal profits. Companies House requires you to also register your company for corporation tax within 3 months after it has been registered and starts trading (you can register for both company formation and corporation tax at the same time). An actively trading company means that your business is providing services or selling its products and is receiving income or making profits. You can consult with your accountant if you’re not sure whether this applies to your company or not. But be informed that missing the deadline for filing corporation tax could get you fined, or worse, be sued for tax evasion.
You also need to file an annual company tax return to the HMRC based on the deadline they’ve set for your company. You’re also required to register for PAYE (pay as you earn) if your company gives employees and other individuals financial compensation (including your own as CEO or company director). Value Added Tax or VAT is also one of the requirements for your company to register with HMRC. Whether you provide services or sell products VAT will be calculated.
How Long Does it Take to Set Up a Limited Company?
Usually it takes about 8 – 10 business days for your limited company to be registered in Companies House, if you do it by post. Or you can work with us and we will fast track your company formation in a matter of hours!
How Will I Get Paid Through My Limited Company?
Compensating yourself from your limited company involves 2 ways.
1.) By taking a fixed monthly salary
2.) By paying yourself dividends out of the company profits (usually paid quarterly)
The best way to go about it is to choose both options, because you benefit through a reduced tax rate.
The greatest benefit of getting dividends is minimal tax due on them and they usually come in huge sums, because they are taken out of the entire company profits. But it takes 3 months at a time before you get paid dividends and there are no added benefits besides that. There are also drawbacks like if the company made negative profits, which will get you zero dividends.
On the other hand, getting compensated with a fixed monthly income will include other benefits such as state pension and maternity or paternity benefits. And on top of that you will get paid whether or not the company makes a profit because unlike dividends, your salary does not depend on the company profits. However, salary is considered as income and is taxed at a higher rate compared to dividends which is considered as capital gains.
Legal Responsibilities of Running a Company
True, while being the CEO and director of your company has its perks, it does not come without responsibilities and some are delicate because they have legal implications. Among them include managing accounts and giving notice to other shareholders whether or not you will personally benefit from certain transactions of the company. Of course, you may also hire a secretary to do these things on your behalf and cut down on the day-to-day grind – just keep in mind that the buck stops with you.
Year-End Reporting for Your Company
You are required to submit annual accounts and a confirmation statement to HMRC and Companies House every fiscal year. The UK government, as well as the company shareholders, investors, creditors and the general public need to know accurate information about your limited company and that it pays its taxes accurately as well. Consult with us if you intend to setup your private limited company.