Setting up a business – is a limited company right for you?
Let’s talk about choosing to incorporate your business (becoming a Limited Liability Company). As a start up business, its important to choose the right structure.
You may already have a business as a sole trader, and want to become a limited company, or you may be starting out. It is important to understand what impact becoming a limited company will have on your business.
What does incorporating mean?
Incorporating means registering a type of company at Companies House: it’s a move that will lend credibility to the business.
This could be a limited company (Ltd), or a limited liability partnership (LLP).
It may also make it easier to borrow money when the time comes. But do look at why you’ve chosen this structure. Being the managing director of a limited company may bring status, but you may regret the move when struggling with the year-end accounts.
Once you register at Companies House as a private limited company (Ltd) you are letting yourself in for more administration.
But it is not as daunting as it used to be – these days you can be the sole shareholder and director, and act as company secretary too.
What am I liable for if the company fails?
The good news is that your home, your family and your lifestyle is protected!
Most private limited companies are owned by their shareholders and are limited by shares. This means that the face value of their share in the business is the most they can pay if things go wrong.
The great advantage of limited liability is that you can control your exposure to financial risk. There’s a firewall between your money and the company’s.
It is a separate legal entity to the company directors, so it is the business itself that shoulders the financial liability.
What taxes will I pay?
The tax regime is more favourable to a registered company than to a sole trader.
Limited companies pay corporation tax on their profits. The company directors are taxed as employees in the same way as other people who work for the company.
The UK corporation tax rate is 19% for the corporation tax year beginning 1 April 2017.
But in a limited company profit there is also a firewall between profit and your income: you will have to pay income tax on the salary the business pays you.
What paperwork will I need to complete?
Once you are trading, you will need to submit accounts and a company tax return to HMRC each year. Your business may also need to make monthly or quarterly payments of employees’ income tax (PAYE) and NICs.
These accounts will need to filed with Companies House, and also a report detailing share holding and ownership each year. Called a confirmation statement.
The size of your business decides on how much information needs to be in these.
Before you can start trading, you need to register your limited company, decide on the company officers and choose a name for your business. Then, once you’ve filed the correct documents with Companies House, you are ready to go.
