There are several reasons why you might choose to set up a limited company in the UK. One reason is that a limited company is a separate legal entity from its owners, which means that the company can enter into contracts, incur debts, and be sued in its own right.
This can provide a degree of liability protection for the owners of the company, known as shareholders.
Another reason to set up a limited company is that it may be more tax efficient than other business structures. Limited companies are taxed as corporate entities, which means that they are subject to corporation tax on their profits.
However, shareholders may be able to extract profits from the company in the form of dividends, which are taxed at a lower rate than income tax.
Limited companies may be able to claim certain business expenses as tax deductions, which can reduce their overall tax liability. Setting up a limited company can also give a business a professional image and may make it easier to attract investment
What is a limited company?
A limited company is a type of business structure that is incorporated under the laws of England and Wales, Scotland, or Northern Ireland. It is a separate legal entity from its owners, who are known as shareholders, and is responsible for its own debts and liabilities. Limited companies can be either privately owned or publicly traded, and they are governed by a board of directors who are responsible for making strategic decisions on behalf of the company.
Shareholders have limited liability, which means that they are not personally responsible for the debts of the company and can only lose the amount of money that they have invested in the company. Limited companies are required to register with Companies House, the UK’s official registry for businesses, and are subject to corporation tax on their profits.
Why set up a limited company?
Setting up a limited company is a great way for entrepreneurs to ensure their businesses are properly organized and managed. A limited company provides legal protection from personal financial liability, while also ensuring a clear separation between the business and the individual. This means that if your business were to suffer any losses, all you would be liable for would be the money put into the business in the form of capital.
Furthermore, having a limited company often creates more trust with potential partners and clients, as they know they are dealing with an established enterprise rather than an individual person. Overall, setting up a limited company can bring many benefits to your business and make sure it has the best chance at succeeding.
When should I change from sole trader to limited company?
There are several factors to consider when deciding whether to change from a sole trader to a limited company:
- Tax efficiency: Limited companies are taxed as corporate entities, which means that they are subject to corporation tax on their profits. However, shareholders may be able to extract profits from the company in the form of dividends, which are taxed at a lower rate than income tax. If you are earning a high income as a sole trader, switching to a limited company structure may be more tax efficient.
- Liability protection: As a sole trader, you are personally responsible for all of your business debts and liabilities. If you switch to a limited company, the company will be responsible for its own debts and liabilities, which can provide a degree of liability protection for you as a shareholder.
- Growth potential: Limited companies can be more attractive to investors and may be better equipped to handle the demands of rapid growth. If you are planning to expand your business significantly, switching to a limited company structure may be a good option.
- Professional image: A limited company may be perceived as more professional and credible than a sole trader business, which can be helpful in attracting clients and building a strong brand.
Ultimately, the decision to switch from a sole trader to a limited company should be based on your individual circumstances and goals. It is always a good idea to speak with a financial advisor or accountant to help you weigh the pros and cons and make an informed decision.
Can I set up a limited company on my own?
Yes, it is possible to set up a limited company on your own in the UK. However, it can be a complex process, and it is important to make sure that you follow all the necessary steps correctly.
To set up a limited company, you will need to choose a company name and make sure that it is not already in use by another company. You will also need to choose a registered office address, which must be a physical address in the UK where official correspondence can be sent.
You will need to draft articles of association, which outline the rules and regulations that will govern the company, and appoint directors and shareholders. You will then need to register the company with Companies House, the UK’s official registry for businesses, by filing certain documents, such as a memorandum of association and a certificate of incorporation.
It is a good idea to seek professional advice when setting up a limited company, as an experienced accountant or lawyer can help ensure that the process goes smoothly and that you are fully compliant with all relevant laws and regulations.
The 7 steps to setting up a limited company
Setting up a limited company in the UK involves the following steps:
- Choose a company name: Make sure that the name you choose is unique and not already in use by another company.
- Choose a registered office address: This must be a physical address in the UK where official correspondence can be sent.
- Draft articles of association: Outline the rules and regulations that will govern the company.
- Appoint directors and shareholders: Choose individuals who will be responsible for managing the company and holding ownership stakes in it.
- Register the company with Companies House: File documents such as a memorandum of association and a certificate of incorporation.
- Obtain any necessary business licenses and permissions: Depending on the nature of your business, you may need to obtain various licenses and permissions in order to operate legally.
- Set up business accounts: This may include a business bank account and any other accounts that are necessary for the operation of your business.
What are the pros and cons of limited company?
The pros and cons of a limited company include:
Pros of a Limited Company:
- Limited liability: Owners’ personal assets are protected from business debts and liabilities.
- Tax efficiency: Potential tax savings through salary and dividend strategies, allowing for more flexibility in managing tax liabilities.
- Professional image: Projects a more credible and established image to customers, suppliers, and investors.
- Protection of company name: Provides legal protection against others using the same company name.
- Pension opportunities: Offers options for retirement planning through pension schemes, providing additional financial security for business owners.
Cons of a Limited Company:
- Higher setup costs: May require more initial investment compared to other business structures.
- Increased paperwork: Involves regular financial statements and corporation tax returns, resulting in additional administrative burden.
- Difficulty in changing company structure: Changing the company structure, such as converting to a different type of business entity, can be complex and time-consuming.
- Public availability of records: Limited company records are publicly available, which may affect privacy and confidentiality.
- Additional reporting requirements: Involves additional reporting obligations, including compliance with company law and regulatory requirements, which can be time-consuming and costly.
How to register a limited company
To register a limited company in the UK, you will need to follow a few steps. First, you will need to choose a company name and make sure that it is not already in use by another company. You will also need to choose a registered office address, which must be a physical address in the UK where official correspondence can be sent.
Next, you will need to draft articles of association, which outline the rules and regulations that will govern the company. You will also need to appoint directors and shareholders, and register the company with Companies House, the UK’s official registry for businesses. This will involve filing certain documents, such as a memorandum of association and a certificate of incorporation.
Once the company is registered, you will need to obtain any necessary business licenses and permissions, and set up any necessary business accounts, such as a business bank account. It is a good idea when setting up a limited company to talk to an experienced accountant or formation agent who can help ensure that the process goes smoothly and that you are fully compliant with all relevant laws and regulations.
How much does it cost to register a company?
The cost of registering a limited company in the UK can vary depending on the specific requirements of your business. The basic fee for registering a company with Companies House is currently £12 if you use the online service or £40 if you use the paper-based service.
However, there may be other costs associated with setting up a limited company, such as legal fees for drafting articles of association and other documents, as well as any necessary business licenses and permissions. It is a good idea to budget for these costs in advance, and to speak with a financial advisor or accountant to get a more accurate estimate of the total cost of setting up a limited company.
It is worth noting that the cost of setting up a limited company may be outweighed by the potential benefits, such as liability protection and tax efficiency, which can make it a worthwhile investment for many businesses.
What taxes will my company pay?
As a limited company in the UK, you will be responsible for paying corporation tax on your profits. Corporation tax is a tax on the taxable profits of a company, and the current rate is 19% for the 2021/2022 tax year.
In addition to corporation tax, your limited company may also be required to pay other taxes, such as value-added tax (VAT) if you are VAT-registered and have an annual turnover above the VAT registration threshold, and employee taxes if you have employees.
It is important to keep in mind that the tax obligations of a limited company can be complex, and it is a good idea to seek professional advice from an accountant to ensure that you are fully compliant with all relevant tax laws and regulations.
How long does it take to set up a limited company?
The process of setting up a limited company in the UK typically takes several weeks to complete. The exact time frame will depend on a number of factors, such as the availability of the company name that you have chosen, the speed at which you are able to gather and file the necessary documents, and any delays that may occur at Companies House.
In general, you can expect the process to take at least a few weeks from start to finish. It is a good idea to plan ahead and allow plenty of time for the setup process, as rushing through it can result in mistakes or delays that may be costly to rectify.
It is also worth noting that setting up a limited company may require a significant amount of time and effort on your part, as you will need to choose a company name, draft articles of association, appoint directors and shareholders, and register the company with Companies House. It is a good idea to seek professional advice to help ensure that the process goes smoothly and that you are fully compliant with all relevant laws and regulations.
How will I get paid through my limited company
As the owner of a limited company, you may receive payment in a number of ways. One option is to extract profits from the company in the form of dividends, which are paid to shareholders out of the company’s profits. Dividends are taxed at a lower rate than income tax, so this can be a tax-efficient way to receive payment from your company.
Another option is to pay yourself a salary as an employee of the company. As an employee, you will be entitled to receive the national minimum wage or national living wage, depending on your age and the nature of your work. You will also be required to pay income tax and National Insurance contributions on your salary.
It is worth noting that the way in which you receive payment from your limited company can have significant tax implications, and it is a good idea to seek professional advice from an accountant to ensure that you are complying with all relevant tax laws and regulations.
Legal responsibilities of running a company
As the owner of a limited company, you have certain legal responsibilities that you must fulfill in order to operate your business in compliance with the law. Some of these responsibilities include:
- Registering your company with Companies House and filing annual returns and accounts
- Appointing directors and ensuring that they fulfill their duties and responsibilities
- Holding annual general meetings and keeping accurate records of meetings and decisions
- Ensuring that your company is compliant with all relevant laws and regulations, including health and safety regulations, employment law, and data protection laws
- Paying corporation tax on your company’s profits and filing tax returns on time
- Protecting your company’s intellectual property, including trademarks, patents, and copyrights
Failing to fulfill these legal responsibilities can result in penalties and fines, and in serious cases, may even result in the dissolution of your company. It is important to seek professional advice to ensure that you are fully aware of your legal obligations as the owner of a limited company.
Conclusion
In conclusion, setting up a limited company in the UK is a complex process that involves choosing a company name, selecting a registered office address, drafting articles of association, appointing directors and shareholders, and registering the company with Companies House.
It is a good idea to instruct an accountant or lawyer to help ensure that the process goes smoothly and that you are fully compliant with all relevant laws and regulations. While the process of setting up a limited company can be time-consuming and costly, it can also offer significant benefits, such as liability protection and tax efficiency, which can make it a worthwhile investment for many businesses.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.