Building a successful business is every entrepreneur’s dream. If you are now thinking of taking that next step and creating a limited company, putting a strong plan in place is essential, especially if you are switching from currently being self-employed or a sole trader.
There are a lot of advantages to running a limited company, including benefits for the tax you pay and your legal liability as a business owner.
Here, the team at VW Taxation takes a look at what a limited company is, how to set one up and how you will pay yourself and your employees.
What is a limited company?
A limited company is a legal structure for your business and it comes with some distinct advantages. To create a limited company, you register your business name with Companies House and agree to abide by the rules. It’s a fairly simple thing to do and, in many cases, you can register and receive confirmation within about 24 hours.
The major advantage of a limited company is that the liability is on the business itself rather than you as an owner. If you were a sole trader outside this structure and something went wrong, you would be liable to put it right, perhaps pay compensation, or suffer legal consequences. Limited company registration protects personal assets such as your home and your finances.
As a director of a limited company, you are paid a wage by that business and are subject to PAYE and NICs contributions like any employee. You will also be a named shareholder and will be able to collect dividends from profits that are taxed differently from normal earnings, with the first £2,000 being tax-free.
Limited companies need to pay corporation tax. This is often less than if you paid income tax as someone self-employed.
There are other advantages. If you decide to retire or leave the company it will survive beyond your departure, safeguarding the people who may work for you.
Limited companies also benefit from having a formal structure. You may find that other companies are more willing to contract your services because you have Ltd after your business name. You could find it easier to raise finance if you wish to expand your business or attract new partners if you want to grow through franchising for the same reason.
Setting up and registering as a limited company
It’s a lot easier than many people think to set up a limited company. The first thing to decide is whether this is the right solution for your needs. It’s certainly worth talking through your ideas with a professional accountancy team like VW Taxation.
Once you have decided it’s right, the next step is to choose a business name. As you are going to be entered onto the register at Companies House, you need to pick something original and which doesn’t sound too similar to an existing company on the list.
Check out the rules on how to choose a company name here.
Next, you need to choose a director or directors and a company secretary. If you are a sole trader, you may well be the only director. You will be completely responsible for the company along with your other directors if you have them.
You do not necessarily need a company secretary but they can be useful to take on some of the roles of the director, particularly relating to administration. They cannot be someone who audits your business or a person who has previously been made bankrupt.
You will need at least one shareholder or guarantor who can be a director, such as yourself. On top of this, you must state the name of a person or persons with significant control over the business.
The next step is often the more difficult for new business owners because it’s slightly technical. You will need to create a memorandum of association and articles of association. These are essentially formal documents that set out how you intend to run your business.
It’s important at this stage to check the records you will need to keep concerning your business and how these are going to be maintained within the new structure. These will include details about the company itself and financial and accounting records.
Finally, you can now register your business with Companies House associating it with the appropriate SIC code that signifies what your company does. The cost for this is currently £12 and the registration normally takes about 24 hours.
Types of limited companies
There are several different types of limited company set up:
- Private limited company – limited by shares: The public cannot buy shares in your business and the liability is spread across those shareholders who are nominated. This is the most popular structure as it is easy to set up online.
- Private limited company – limited by guarantee: Usually employed by non-profit organizations such as charities, there are no shareholders, and board members act as guarantors.
- Public limited company or PLC: In this case, shares are offered to the public and there are greater legal obligations such as having more than one director and a minimum of £50,000 share capital.
- Limited liability partnership or LLP: The partners are equally liable for the company rather than the shareholders and they decide how the business is run.
- Private unlimited company: This type of business is rare, does not have to submit annual returns or accounts and shareholders are equally responsible, sharing debt if the company goes bust.
Paying yourself and employees as a limited company
As the owner, you will be paid your salary through PAYE as will your employees if you have any. That means you will be liable for the standard rates of tax and NI contributions on the amount you pay yourself. You can also receive revenue as a shareholder through dividend payments which are subject to different tax rules.
If you are planning to set up a limited company, it’s well worth talking things through with a team of professional accountants. Contact the expert team at VW Taxation in Portsmouth today to find out how we can help.