Many individuals initially start a new business venture as sole traders but once they have established and started growing the business, it often makes sense to set up a private limited company as there can be many advantages to limited companies over being a sole trader.
In this blog we cover the 7 things to consider when setting up a limited company.
Is setting up a limited company right for your business?
Many businesses operate as sole traders in the UK (not registered with UK Companies House), but there are many advantages of setting up a limited company in the UK. These advantages include greater tax efficiency, separate legal entity, limited liability, protected business name along with other advantages.
Read our blog to see more details on the advantages of setting up a limited company in the UK.
7 things to action and consider when setting up a limited company
Choose which type of limited company to set up
All limited companies in the UK have to be registered at HMRC and Companies House. The most common legal structure you can choose is a private company limited by shares. This is suitable for most commercial enterprises; however, it is worth considering the different types of private limited companies available in the UK.
Your decision on which business structure is right for you will be dependent on your own circumstances but some of the things that may influence your decision are:
- The type of business you run.
- The turnover, growth and potential future growth of your business.
- The level of risk you take as an individual.
- The support you have from advisors and internally to manage paperwork.
- How customers see you and your professional credibility.
The different types of limited companies in the UK are:
- Private company limited by shares (LTD)
- Private limited by guarantee (LTD)
- Limited liability partnership (LLP)
- Public limited company (PLC)
- Private unlimited company
If you didn’t form a limited company (to protect its name) when you began as a sole trader, then you will need to check with Companies House if the company name is available. Choosing a company name can be hard, especially if you have built up a reputation under a name you used whilst self-employed and that name isn’t available at Companies House. You can use the Companies House availability checker online.
When you’ve found a name that is available, you need to legally form the company with Companies House. You can form your limited company online. Our company formation service will take the hassle away and will register your new limited company with companies house.
If the company you are forming is a private limited company, the company name must end in ‘limited’ or ‘ltd.’ unless it is exempt.
Your companys registered office address
To register your limited company you will need to provide a company address. This address must be a genuine physical address, not simply a PO Box number. If you decide to use your residential address, it is important to remember that the information will be publicly available at Companies House on your company records and this may attract marketing from other companies.
Many people who have businesses based from home or where individuals are based abroad may want to consider a virtual registered limited company address. Here at dns accountants, we offer a registered office address service that provides you with privacy and a prestigious London office address as well as a mail handling service.
The limited companys officers, shareholders and share structure
The company’s officers comprise of appointed directors and potentially a company secretary. They are the people that have been authorised to represent the company and make decisions as to how it is run.
How many limited company directors should you have?
You need at least one director and at least one shareholder to form a UK limited company. They can be the same person. There is no upper limit to the number of directors or shareholders, you can nominate as many as you wish. However, Directors have to be over 16 and when opening a bank account, it’s normal banking rules for Directors and Shareholders to be over 18.
Your duties and responsibilities as a limited company director
As a director of a limited company, you have duties and roles must:
- follow the company’s rules, shown in its articles of association
- keep company records and report changes
- file your accounts and your Company Tax Return
- tell other shareholders if you might personally benefit from a transaction the company makes
- pay Corporation Tax
You can hire other people to manage some of these things day-to-day (for example, an accountant such as dns accountants) but you’re still legally responsible for your company’s records, accounts and performance.
limited company shares
The company can issue different types of shares. In most cases, especially when the company is first formed, ‘ordinary’ shares will be issued. Ordinary shares provide equal rights and responsibilities to all shareholders.
To register a company limited by shares, you need to issue at least one share. A ‘share’ is a portion or percentage of the company. If a company issues only one share, it will represent 100% of the company. If one person owns that share, they own the whole company. However, if two or more shares are issued, the company is divided, this means that you can have more than one person owning a percentage of the business and these percentages can be different i.e. a 75% and 2% split.
Typically, each share provides the right to a certain percentage of profits, as well as one vote on important business decisions. Share capital is the total amount of money (‘capital’) invested by shareholders (‘members’) in exchange for shares in a company.
Owning more shares and having greater share capital usually provides more financial liability, voting power, control over the business, and a higher profit entitlement.
It may also be worth considering a spouse as either a director or company secretary if you are the only director of the company. This may help if anything happens to you as they will be able to deal with HMRC and Companies House in your absence. The appointment of a company secretary is optional for all private limited companies incorporated in the UK. This provision can be added or removed from the articles at any time by the shareholders.
Be cautious at this stage who becomes directors and shareholders in your company and any future issues that may occur.
Company standard industry classification (SIC) code
A SIC code is a five-digit code used to classify your business activities. Standard Industrial Classification (SIC) codes are essential to get right while establishing your limited company or potentially diversifying your business.
To select a SIC code you need to pick from the list of SIC codes at Companies House and choose the one that most identifies with your company’s business activities. In most cases you will only need to select one code. However, if your company is involved in several business activities, you can opt to choose multiple codes.
Person with significant control (PSC)
A person with significant control (PSC) is someone who owns or controls your company. They’re sometimes called ‘beneficial owners’.
You must identify your PSC and tell Companies House who they are. This might be you, or someone associated with your company. A company can have one or more PSCs.
You must record their details on your company’s PSC register, and you’ll need to include this information when you set up (incorporate) your company.
Memorandum and articles of association
When you register your company you need:
- a ‘memorandum of association’ - a legal statement signed by all initial shareholders or guarantors agreeing to form the company
- ‘articles of association’ - written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary
Memorandum of association
If you register your company online, you don’t need to write your own memorandum of association. It will be created automatically as part of your registration.
Articles of association
You can either:
- use standard articles (known as ‘model articles’).
- write your own and upload or send them when you register your company.
What records do I need to keep when running a limited company?
Limited companies must keep a number of records, including financial and accounting records, to comply with the strict record-keeping, accounting, and reporting requirements needed by Companies House and HMRC.
When setting up a limited company you should keep copies of its certificate of incorporation, the memorandum and articles of association, and all share certificates (if applicable).
Ongoing, a private limited company must keep the following records, where applicable:
- Register of members (shareholders or guarantors)
- Register of company directors
- Directors’ service contracts
- Register of Secretaries
- Register of People with Significant Control (PSC register)
- Records of resolutions and minutes of meetings
- Directors’ indemnities – security against liability claims or legal costs
- Contracts relating to purchase of own shares
- Documents relating to redemption or purchase of own shares out of the capital by a private company
- Register of debenture holders
- Instruments creating charges and register of charges – i.e. mortgages or secured loans
Accounting records are also crucial to running a limited company as follows:
- All money the company has received and spent.
- Details of assets the company owns.
- Debts the company owes or is owed.
- The stock takings you used to work out the stock figure.
- All goods bought and sold.
- Who you bought and sold your goods to and from – unless you run a retail business.
- Records of all money the company has spent, such as receipts, petty cash books, orders and delivery notes.
- All money it has received, via invoices, contracts, sales books and till rolls.
- Any other relevant documents, such as bank statements and correspondence.
If a company is VAT registered, it must also keep and retain business and VAT records to account for all VAT transactions and to complete VAT returns.
Companies that are registered as employers must keep PAYE records to work out the right amount of PAYE and National Insurance Contributions to pay, complete annual PAYE returns, and show that employees are receiving the statutory pay they are entitled to.
Limited companies must keep records for six years from the end of the last company financial year they relate to.
The advantages and disadvantages of setting a Limited Company
Before launching, you should consider the advantages and disadvantages of setting up a limited company.
The advantages of setting up a limited company are:
- Limited liability, meaning you as an individual will not be personally responsible or personally liable for any debts the company incurs or financial difficulties. The company has a separate legal identity to you as an individual and so your personal finances are separated from your business finances.
- Credibility - There is no doubt that the use of "limited" can add professionalism to a business. It may be seen by your customers as more credible, permanent or reliable and can project a more professional image.
- Tax benefits - Whilst running a limited company means you will have to complete a company tax return and the tax requirements can be more complex, in most cases, a limited company route is more tax-efficient from a personal tax point of view than operating as a sole trader.
- Protecting your trading name - Limited companies are required to have unique names, therefore incorporated businesses are protected from others using their trading name if they have incorporated at Companies House.
- Easier access to finance - If you want to grow your business, fund capital purchases such as buying plant & machinery, you may need to access credit, finance or business loans. Being a limited company will offer you more finance opportunities to raise capital for the business now and in the future.
The disadvantages to forming a limited company can be:
- Limited companies must be incorporated at Companies House and there is a cost to incorporation.
- Your choice of company name may be restricted if others have claimed the name already.
- You will be required to pay Corporation tax on profits and submit Corporation tax returns.
- You will be required to submit a Confirmation Statement and annual accounts to Companies House each year.
- You cannot set up a limited company if you are an undischarged bankrupt or a disqualified director.
- Personal and corporate information will be disclosed on public record at Companies House.
- Strict rules apply when withdrawing money from the business.
- Limited companies need to adhere to strict record-keeping requirements, including minutes of meetings and recording all decisions taken by directors and shareholders,
- Any changes to your company details, must be notified to Companies House immediately.
- You are likely to need an accountant such as dns accountants when preparing your annual companys accounts for submission to Companies House. You will also more likely need an accountant to fulfil the companys tax responsibilities and offer you tax planning advice.
Limited company registration and set up can offer many benefits over being a sole trader, including being more tax efficient. Being a sole trader can be easier but setting up a private limited company is not a complex process, but certain rules must be followed.
For help and advice on setting up a limited company in the UK, contact our team and book a call today.
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