How to start a Limited Company
Working as a freelancer, contractor, or small business owner can be incredibly rewarding, but starting a limited company also has plenty of benefits.
This guide, written by our experienced chartered accountants, will give you all the advice you need to start and run a successful business.
We’ll take you through everything you need to know, including:
Starting the Limited Company
To start a limited company, the very first thing to do is register your business with
Companies House and make yourself the director of your new business.
As part of our comprehensive accounting service, we can handle the whole Company Formation process, making it all simple and easy.
We’ll give you all the great advice you need to get your business up and running as quickly as possible.
Here’s exactly what we can do for you:
A list of all the directors and other people involved in running the business.
Certificate of Incorporation:
The official confirmation of your company’s formation.
Articles of Association:
This sets out the terms and conditions of how your company will be run.
Shows what shares are worth and how they are allocated.
Memorandum of Association: This sets out how the company is run and owned.
What’s the difference between a shareholder and a director?
A shareholder (or multiple shareholders) owns the business, whereas a director actually runs the business.
It’s possible to be both a director and a shareholder, which is exactly the case if you start your own business.
What do you need to do before running your business?
To ensure your business is run as smoothly as possible you’ll need to:
- Have Articles of Association and a Shareholder Agreement.
- Choose the right shareholders and directors (both of these roles will most likely be taken by you if you’re starting your own business).
- Decide on your registered address, which is where official correspondence from Companies House and HMRC is sent to, but can be a separate address from where you run the business – get in touch to ask about our Registered Address service.
Business bank accounts
Since a limited company is a separate legal entity from its director/s, you’ll need to keep all personal accounts separate from the business’s accounts.
A limited company has its own legal requirements, which are separate from the owners, and any profits and losses belong to the business.
This means you’re legally required to have a company-owned bank account, even if you’re the only director and shareholder.
However, this shouldn’t be seen as a burden, since it makes it easier to record all transactions separately from your personal accounts.
If you worked as an employee, your tax would be automatically deducted from your salary in the form of PAYE, making it very simple for you.
However, a limited company has tax obligations that you’ll need to become familiar with in order to run your business within the law, and not make yourself liable to pay penalties.
As chartered accountants with many years of experience, we can make tax easy for you and your limited company by doing all the hard work, and by helping you make some important decisions.
Value Added Tax (VAT) is a percentage (currently 20%) a company will have to pay on any goods or services they sell (funded by adding 20% to their prices) if their annual turnover exceeds £80,000.
If your limited company is set to make a lower turnover than this threshold, you won’t need to pay VAT or even register for VAT.
VAT Flat Rate Scheme
The Flat Rate Scheme is one of a few different ways to pay VAT.
The Flat Rate Scheme was designed for small businesses with an annual turnover of £150,000 or less.
It’s designed to be simpler than the other methods because instead of calculating VAT on each and every goods or service sold, you can pay a flat rate of VAT on your turnover as a whole.
Depending on your industry, it’s often a lower rate than the standard VAT rate, but you can still charge your clients 20% VAT – however, you’ll need to consider registering for the Flat Rate Scheme carefully, since if your clients aren’t VAT registered, they won’t have any way to offset this extra cost, so you could lose clients.
Get in touch, and we can take you through all the methods of paying tax, and help you decide on the one that works best for your business.
Corporation Tax is applied to your company’s profits after your employees’ salaries are paid, but before dividends are paid to shareholders.
As a limited company, you’ll be required to pay tax on profits and submit a CT600 each year.
You’ll need to register within 3 months of starting your business, though this is usually done as part of the company formation process.
When do you need to pay Corporation Tax?
Your limited company will need to pay Corporation Tax on or before 9 months and 1 day after the end of your accounting period, which is usually the same as your financial year.
If Corporation Tax is paid late, your company is likely to be charged interest.
However, the opposite is also true – HMRC may pay your company interest if you make an early payment.
With us by your side, we’ll make sure you never miss a deadline and don’t incur any penalties.
If you’re currently running your business as a sole trader, you’ll already be submitting and paying self-assessment tax returns.
This is no different if you are running a limited company – as a director, you’ll need to pay tax on any income you receive in the form of dividends or salaries paid to you by the company.
When do you need to complete a self-assessment tax return?
First you’ll need to register for self-assessment with HMRC to let them know you are receiving a personal income and need to pay tax on it – the easiest way to do this is by completing the relevant forms on HMRC’s website.
Your self-assessment tax return must be submitted by October 31st after the end of the respective tax year if submitting by post, or by January 31st if submitting online.
Unless you’re exempt, your company will need various types of insurance, three of which are essential.
But far from being a burden, insurance can offer you and your business security.
Public Liability Insurance
If your company ever causes damage to somebody or their property, or even causes their death, Public Liability Insurance will cover you for any claims made against you.
This isn’t compulsory, but it’s still a good idea to have.
Employer’s Liability Insurance
If you own over 50% of the company and are the only employee, you won’t need Employer’s Liability Insurance.
However, if your company employs at least one other person, Employer’s Liability Insurance is compulsory. It will cover you against any claims an employee makes for injuries caused by the company.
Professional Indemnity Insurance helps protect companies that provide professional servicessuch as solicitors, accountants, or even architects.
It will cover you against any losses to clients based on any bad advice your company gives them.
Most companies providing a professional service require it to operate, either by law or as a requirement of trade membership, depending on the profession.
Tax Investigation Insurance
Tax Investigation Insurance isn’t compulsory, but it will cover you against any potential tax investigation by HMRC, which can be expensive and time-consuming.
Once your company has done some work for its clients, you won’t be paid automatically.
You will first need to write an invoice and send it to the client, showing how much they are required to pay for the services or goods provided.
Here are the legal guidelines you will need to follow in order to validate the invoice:
- It must include the name, address, and registration number of your business
- It must include the name and address of your client
- It must include the word invoice on it
- It must include a description of the goods or services being provided
- It must include when the goods or services were supplied if different from the invoice date
- It’s not compulsory, but you can include the payment terms and show how to make the payment
If your company is VAT-registered:
- It must include sequential invoice numbers on any invoices you send
- It must include an itemised breakdown, showing the rate
What can you claim as expenses?
It’s a common question, but one that doesn’t have a universal answer since it depends on your personal situation and the type of business you run.
However there are still some general rules and guidelines you can follow.
How are you compensated?
You won’t receive cash from HMRC for the expenses you claim for, but it is instead deducted fromyour total taxable revenue, so you’ll pay less tax.
For example, if your company makes £20,000 in profits and you have business expenses of £2,000, you’ll only pay Corporation Tax on £18,000 of your company’s turnover – of course, it’s not really this simple because you’ll also have to account for things like VAT and salaries.
Expenses from before the company formation
You can also claim expenses on any money spent for business purposes before and during the formation of your limited company.
Business, not pleasure
Expenses can only be claimed for things that are used exclusively by the business.
If you buy something to be used by the business, such as a car, but you start to use it in your personal
time, it’s unlikely you’ll be able to claim it as a business expense.
Salary and Dividends
As a sole trader, all of your profits automatically belong to you.
However, the profits of a limited company belong to the business itself.
How does your limited company pay you?
Your business will pay you a salary if you’re an employee/director, or pay you dividends if you’re an owner/shareholder.
Since you’re both an owner and an employee of your limited company, you can split payments between a salary and dividends for the most tax-efficient income.
After a business makes a profit, and after 20% Corporation Tax is deducted, the profits can be withdrawn by shareholders in the form of dividends. They are paid in proportion to how many shares each owner has, but this will be easy to work out if you’re the sole owner.
To be classed as a dividend, the money must be withdrawn from the company’s profits. Otherwise, it will be recorded as a director’s loan.
If you receive an income below the higher tax rate – a salary of £41,865 in 2014/15 – you’ll only be charged 10% tax on dividends, but you can claim a tax credit to this amount to stop you from paying tax on your salary twice.
As the director of your limited company, the most tax-efficient salary is £7,956 (2014/15), because it’s just below the threshold of being required to pay National Insurance, but just over the minimum to qualify for state pensions.
If you’re the sole employee of your limited company, you are not required to pay yourself the minimum wage.
PAYE and National Insurance
Pay As You Earn (PAYE) is a tax taken from employee salaries, applicable to anybody earning at least £10,000 (2014/15).
If you’re going to pay yourself a salary, you’ll need to set up a PAYE scheme with HMRC. You’ll face penalties if this isn’t done properly, or on time.
We offer payroll administration as part of our comprehensive accounting services, so get in touch for a free consultation.
What’s the most tax-efficient combination?
When deciding on how much to pay yourself, you’ll have to think about whether you want to pay the least tax possible, or if you’re happy to pay yourself more at the cost of having to pay a higher rate of tax.
If you want to be as tax-efficient as possible, we recommend a combined income of £38,114 (2014/15).
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