Setting up a limited company – what you need to know

When you set up a limited company you are creating a legal and financial structure which is separate from you as an individual. People choose to do this because a company has limited liability. This means that if your business has debts or is sued you will only be liable to the value of your share of the business and your personal assets will be protected. 

 

Your limited company can have one or more directors with a share of the business and must be registered at Companies House. It will have its own bank accounts, pay its own taxes and it can be bought or sold. 

 

As a sole-trader your personal finances aren’t separate from your business so if you run into financial or other difficulties your personal assets would be at risk. 

 

Probably the biggest benefit of a limited company is that your personal assets are protected. Companies also pay a lower rate of tax on profits. As your turnover increases as a sole-trader, you could find you would pay less tax as a limited company, but you will need to think about the additional administration involved. 

 

Companies can often access different options for business finance such as private equity funding where you sell shares in your business. 

 

You can be the sole employee and only director of your company and, if you work as a contractor, you can reduce the likelihood that your clients will need to treat you as an employee for tax and legal purposes under the IR35 rules. As a contractor you would also be protected from personal losses if you were sued by clients. 

 

Choose a name – you will need to choose a company name that isn’t too similar to an existing company. Your company name must not have any false implications so, for example, you can’t suggest that you have approval from an official body if you don’t. You can choose to trade under a different name, but you can’t add ‘Ltd’ if it isn’t the name you have registered for your company. 

 

Appoint a director – your company must have at least one director but can have several. Directors make decisions for the company together and are responsible for filing the accounts and paying corporation tax. You can also appoint a company secretary to handle administration and make sure the directors’ decisions are carried out, and that the company meets its regulatory requirements. 

 

Choose shareholders – a company must have at least one shareholder who can be a director. Shares can be divided between directors and they don’t all have to have the same amount of shares. Shareholders can vote on decisions at shareholder meetings with one share equalling one vote, so if you held three shares and another director held one you would be the majority shareholder. A shareholder with more than a quarter of the shares is a ‘person of significant control’ (PSC). 

 

Prepare your company documents – your company must have certain documents that describe what it is for and how it will be run. These are: 

 

Maintain your records – records about important details of the company such as its PSCs and accounts must be kept for at least six years. 

 

Register with Companies House – your company details and official address must be registered at Companies House along with a SIC code that describes your business type. You can register for corporation tax at the same time and you must be registered within three months. You can register online or by post. If you choose not to use ‘limited’ in your company name you will have to register by post. Registration is normally within 24 hours of your online application or it can take up to 10 days if done by post. You will then receive: 

 

Once your company is registered you need to file an annual company tax return by the deadline given to you by HMRC and register for pay as you earn (PAYE) tax if the company pays any salaries, including your own as Director. 

 

Depending on your turnover you might also need to register for VAT and returns will need to be submitted online using suitable software to meet the requirements of Making Tax Digital (MTD). 

 

As director you can receive income from your company as a salary on which you will pay personal income tax and you can also pay yourself dividends out of company profits. As a tax-efficient approach most directors choose a combination of the two because less tax is due on dividends. However, your company must be profitable for you to draw dividends. 

 

You will be responsible for managing the company’s accounts and you must tell the other shareholders if you will personally benefit from any company transactions. 

 

At the end of each financial year, you must report key information to HMRC and Companies House and pay the tax your company owes. You must also provide accurate information to your shareholders, investors, and creditors.