Limited Company
Incorporating as a limited company allows you to set up the business as a separate legal entity.
This has the advantage of limiting any liabilities of the business to the assets of the company only, and therefore your personal assets are kept safe.
A word of caution
Running a Limited Company does increase the level of business administration required and you may wish to employ specialists to help with this.
You may also find that banks will often request a personal guarantee from the directors; but then these personal guarantees can negate any limited liability.
Requirements & Obligations of a Limited Company
A certificate of incorporation has to be granted by Companies House before trading can start.
In order to obtain the certificate of incorporation, the following information must be presented:
- The company’s name and registered address
- At least one director
- At least one shareholder
- Memorandum of association - details of the company’s shares
- articles of association - rules about how the company is run
For more information, visit the government website:
https://www.gov.uk/limited-company-formation/register-your-company
- To make things simpler, it is possible to buy a company “off the shelf”, which is a dormant company already set up,
- which means that it is only necessary to file the amendments with Companies House.
- The company name needs to be approved by the Company Registrar, as the name must be unique.
- It is possible to have one person being the sole shareholder and sole director of the company and be the only person working for the company.
- This is sometimes called an FSO Company – “For the Services of” or personal service company.
- This will not affect the legal standing for the company,
The HMRC may decide that the company is operating purely to provide a tax advantage if:
This is detailed under IR35 legislation.
- The individual is clearly working as an employee of an organisation
- Should therefore have been contracted directly and on their payroll having tax deducted at source, rather than being paid gross as a contractor.
Legal Status of a Limited Company
There are strict legislative requirements when running a company, which are defined in the Companies Act 2006.
These include:
- maintaining statutory books of account
- holding an annual general meeting
- filing financial statements and annual return with Companies House
detailed legal requirements for a Limited Company
There are also detailed legal requirements for directors of a limited company, the gov.uk site states that directors must:
- Try to make the company a success, using your skills, experience and judgment
- Follow the company’s rules, shown in its articles of association
- Make decisions for the benefit of the company, not yourself
- Tell other shareholders if you might personally benefit from a transaction the company makes
- Keep company records and report changes to Companies House and HM Revenue & Customs
- Make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
- Register for Self Assessment and send a personal Self Assessment tax return every year
- The Company must register with HMRC for Corporation Tax, and submit a Company Tax Return at the end of each year.
VAT: Value Added Tax
The rules of VAT also apply as above, the company must register for VAT if their sales / income is in excess of £81,000 (2014).
Additional Information
- It is common for owner / directors to be paid partly as an employee of the company and the remainder in dividends based on the shares they own, this may provide an allowable tax advantage to the individual.
- It is important to ensure that the processes are operated correctly and tax is paid over to HMRC at the appropriate times. This will involve setting up a payroll to pay the director’s salary.
- The directors must declare their earnings and complete self-assessment tax returns each year.
- It can be advisable to employ accountancy specialists to manage this for the company.
company limited by shares
The most common form of a limited company is a company limited by shares.
A company limited by shares has shareholders and tends to be used in profit making ventures.
The owners of the business reap rewards in the form of dividends.
- These are distributed profits, so the more the company makes, the more the shareholders gain. Shareholders can also gain by the value of their shares appreciating. If a company is successful the value of the shares will increase. The converse is also, of course, true. In a doomsday scenario, the shares can become worthless.
The most common form of a limited company is a company limited by shares.
A company limited by shares has shareholders and tends to be used in profit making ventures.
The owners of the business reap rewards in the form of dividends.
- These are distributed profits, so the more the company makes, the more the shareholders gain. Shareholders can also gain by the value of their shares appreciating. If a company is successful the value of the shares will increase. The converse is also, of course, true. In a doomsday scenario, the shares can become worthless.
A Challenge
One challenge when running a private company concerns the extraction of funds from the company for personal use.
- Many company owners understandably do not make a distinction between the company’s funds and their personal funds, and see them as one of the same.
- If not correctly done directors may fall foul of employee benefit and tax rules with significant consequences.
- Tax advantages may be negligible if, for example personal service company legislation (commonly known as IR35) applies.