Setting up a limited company might seem like a daunting ordeal compared to setting up as a sole trader but while there is more red tape and form filling involved, if you follow the correct steps you could end up with more money in your pocket through the multiple financial benefits such as paying less tax and limited liability. Registering a limited company can be a relatively painless process thanks to all of the company formation agents available online – some of which you can do in as little as 10 minutes. However, before you dive in you will want to make sure that setting up a limited company is the right business structure for you. In this article, we’ll be discussing everything you need to consider and how to go about setting up a limited company.
What is a limited company?
A limited company is a business that has its own legal identity and the shareholders and directors liability is limited to what they have put into the business. This means that business contracts and any business debts belong to the company and not you personally as a company director. You are protected by limited liability; that is you are only liable for what you have put into the business and in the event that the limited company goes bankrupt, you and any other shareholders or directors are not required to sell your own assets in order to pay off the debt as your personal finances and possessions are protected. Although you can effectively only lose what you have put into the business, there are exceptions to this such as if a director has given personal guarantees (perhaps agreeing to personally guarantee to pay money back from personal finances if the business cannot meet the payments to secure lending or a contract) or has been found guilty of fraud. This differs from a sole trader where you and the business are treated as one and you are fully liable for any debts incurred by the business.
On the flip side, this legal separation is also designed to protect the business, ensuring that shareholders and directors alike are not able to withdraw funds from the company at their leisure. The money earned by the company belongs to the company itself rather than the individuals at the helm. This doesn’t make it difficult to access the money to pay yourself, but there does need to be a greater degree of accounting than required from a sole trader.
What is the difference between a private and public limited company?
There are two different types of limited company, private limited companies (LTDs) and public limited companies (PLCs). Most business owners moving on from becoming a sole trader or setting up small businesses begin as private limited companies (LTDs) as it is more appropriate for those starting out, but they can decide to become public limited companies (PLCs) in the future. Let’s take a look at the difference between the two:
Private limited companies (LTDs)
As the name suggests, the shares a private limited company (LTD) are privately owned and are not on offer to the general public. As such any new shares in the company are controlled by existing company directors. Private limited companies (LTDs) must also have at least one director.
Public limited companies (PLCs)
The main difference between a private (LTD) and public limited company (PLC) is that a public limited company (also as the name suggests) is able to freely sell shares to the public and can be listed on the stock exchange. Public limited companies (PLCs) are the only type of company that is able to raise its own funds by this public investment method. They must also be in possession of at least £50,000 in allotted share capital, with a minimum of 25% being paid up in full. Public limited companies must have a minimum of two directors, as well as a company secretary that possesses professional qualifications. Give these formal conditions, it is easy to see why a private limited company (LTD) is a more popular route to business setup.
Why set up a limited company?
There are wide range of advantages of being a limited company, but its main advantages include:
Limited liability protection
As mentioned earlier in the article a major benefit of a limited company is that it is its own legal entity which grants you limited liability. As a director your personal finances and assets are protected as your liability for the company’s debts is no more than the amount of money you paid for the shares. So, if the business goes under, you will not be held responsible for any of its losses, unless you have made personal guarantees or you have committed fraud. This differs from a sole trader as they are liable for every penny of the business debt and can lose personal finances and assets (such as their home) in repaying those debts.
National Insurance and tax efficiency
As a limited company you are more likely to be able to find tax savings with one of the biggest areas being around pay and business profits. As a limited company director you are able to pay yourself a minimal salary (to avoid the lowest tax threshold) and the remainder in dividends that are taxed at a lower rate than a income tax thresholds. Equally, corporation tax on profits is lower than the higher rates of income tax a sole trader will pay on their profits. This means you can potentially pay less in tax and end up with more in your pocket vs that of a sole trader.
Easier access to finance
As a limited company is a separate legal entity, it is often easier for them to secure finance and investment than if they were a sole trader. Companies are also able to raise capital by giving new investors and shareholders new shares, whereas sole traders will be required to raise new capital from their personal funds.
How much does setting up a limited company cost?
There are two typical routes to forming a limited company and you will be pleased to know both are relatively cheap. You can either do this directly through Companies House and it will cost £12 and normally be registered within 24 hours. The process is relatively straightforward but you will need to complete a series of documents yourself, although there is a lot of help and guidance along the way.
Alternatively, you can use one of the many company formation agents to do this on your behalf and this is generally easier and quicker than doing it yourself. The costs for these services vary with many being cheaper than the £12 fee from HMRC along with incentives to take other products (such as cash back if you take out a business bank account). Through formation agents, companies can be registered in as little as 3 hours.
How to register a limited company
1. Choose what kind of limited company you want to set up
Once you’ve made the decision to set up a limited company, you need to choose between a private limited company (LTD) and public limited company (PLC). The majority of small businesses, start-ups and freelancers will choose to set up a private limited company (LTD) as public limited companies (PLCs) are required to obtain a £50,000 minimum share capital, a qualified company secretary and two directors. The private limited company (LTD) route is the more suitable for most due to it being simpler in terms of financial and setup requirements.
2. Choose your company name
Often an overlooked step, this can be one of the most frustrating parts of the process when forming a limited company if it has not been carefully considered. The name of your company must be completely unique and not too similar to any other registered company names. Look in Google Search, search the Companies House register and check the Intellectual Property Office (IPO) to see if the your desired name or close matches are already registered. If it is taken or there is a similar name already registered you may need to think again. There are also a whole host of other considerations when registering your company name with Companies House, such as restricted names and sensitive words so it is worth doing your research to avoid disappointment.
3. Choose company officers
All limited companies are required to have at least one company officer who is responsible for the business at all times. Private limited companies (LTDs) need to have at least one company director, which is normally the person setting up the limited company, while public limited companies (PLCs) need at least two directors and a company secretary.
Company directors manage the company in accordance with its articles of association and the law. They are also responsible for ensuring annual accounts and annual returns, as well as all notices of change such as the registered office address, are received by Companies House. You cannot be a company director if you’re an undischarged bankrupt or have been disqualified by a court from holding a directorship, or are aged under 16.
Company secretaries, usually in place in larger companies, are responsible for maintaining statutory registers, keeping minutes of board meetings, and ensuring all statutory filings are completed. They’re typically professionally qualified accountants, barristers, solicitors or advocates.
4. Choose a registered office address
As part of the business registration you need to provide a registered office address where all official documents and legal notices are to be sent to. A registered office address must be based in the UK and be made public on the Companies House register. This does not need to be an address where the business trading takes place and it can be a residential address (often a directors home address). However, as this is public record many choose to use a registered office address service and have mail forwarded to another address. It is worth noting that you can change the registered office address at a later date.
5. Complete the incorporation process
All limited company registration in the United Kingdom must pass through Companies House. You can either register a limited company yourself through Companies House or use one of the many online company formation agents. Many choose to go through a company formation agent as the process is cheap, quick (quicker than if you do it yourself through companies house) and easy. Either way you will need to complete the following documents but if you use a company formation agent, they normally take care of this paperwork for you:
– Articles of Association: These will outline the rights of shareholders and the director’s powers and are sometimes provided by the formations company responsible for setting up the limited company.
– Memorandum of Association: This document will state the type of business you are setting up and the name and location of your limited company.
– Form IN01: This document will state the registered limited company address and the names and addresses of the directors. The registered limited company address does not have to be the address from where you work, but it is the address where the legal correspondence with Companies House and HMRC is sent.
When your limited company is registered with Companies House you will receive a Certificate of Incorporation which confirms the company’s existence along with the registered company number and date of incorporation. You will then need to register your limited company with HMRC within three months of starting trading. If you don’t, you risk a penalty.
Do I need to set up a business bank account?
As a limited company director you will need to effectively record and trace all business income and expenditure. Although there is no legal requirement to setup a business bank account for a limited company, it makes it easier to trade and manage your business income and expenditure when it is through a separate account. Many banks offer incentives and business advice to new customers that can make this initial effort worthwhile. During the incorporation process, some company formation agents will offer cashback incentives for you to open up a business bank account with their providers. They also receive a commission when you open up the business bank account – it is one of the ways in which they are able to offer low cost company formation services.
Do I need to take out business insurance?
Similar to business banking, you do not need to take out business insurance but depending on the risks that accompany your products and services, you may want to consider covering against them. If your business comes into contact with the public, for example, you may want to consider public liability insurance to protect you against compensation claims for injury or damage made by clients, customers, suppliers, or other third parties. Whether you feel you need business insurance is really down to the levels of risk your business manages and how comfortable you are with your exposure to them. It is worth researching whether you might need business insurance in your field.
Responsibilities of a company director
If you have set up a limited company, there are a number of financial and legal responsibilities that you will need to take care of if you are the company director, including:
– Submitting your annual corporation tax return to HMRC and ensure that any tax liabilities are paid on time and in full.
– Ensure that you and your members of staff are paid correctly while ensuring that national insurance and income tax contributions are deducted where applicable.
– Keep detailed accounting records to ensure that your accounts give a fair and true representation of your company’s financial position.
– Submit accurate and detailed company accounts (annual return) and ensure that they are filed with Companies House on time.
– Ensure that your business is able to meet its financial liabilities.
– File and complete the annual Confirmation Statement.
– Maintain and produce a Persons with Significant Control (PSC) register. This must be filed with Companies House as part of the Confirmation Statement every year.
– Contact Companies House to inform them if any changes have been made in the particulars of the company secretary or company directors.
– Contact Companies House if your registered company address has been changed.
– Act in the company shareholders’ interests.
– If your business turnover exceeds the VAT threshold, currently £85,000 (April 2017) then your company must be registered for VAT and quarterly VAT returns completed online.
If setting up a limited company still doesn’t seem the right choice for you, you may want to consider setting up as a sole trader. Depending on your situation and business needs, there are many advantages of being a sole trader that you may be more appealing to you.