Answers to the top ten most frequently asked questions about Limited Company ownership . . .
- What is a limited company?
- What are the advantages of trading as a limited company?
- Who can set up a limited company?
- What kind of accounts and records must a company maintain?
- When will I need to charge VAT?
- Do I have to submit any documents annually?
- Do I need a company secretary?
- What information do I need to set up a limited company?
- Do I have to trade immediately?
- What if the company doesn’t take off or I no longer need it?
1. What is a limited company?
A private limited company (LTD) is “an individual legal entity which is separate from that of its officers” (technical speak for the people who run it). A limited company has its own assets and liabilities, profits and losses. The liabilities are limited to the company - in other words, the owners are protected from financial liability should the company encounter any difficulty. This is different from that of a sole trader or partnership, where the assets and liabilities of the business belong to the individuals.
For example if you are a sole trader window cleaner you’ll more than likely own your ladders, the same goes if you were an IT freelancer you will own the hardware. However if these two individuals traded through their own limited company, the company will more than likely own the assets i.e. ladders and hardware.
Ownership of a limited company is through issuing shares, in small owner managed businesses the shares are usually owned entirely by the Directors. Limited companies must also submit annual accounts to Companies House each year which are made available to the general public (an accountant will usually do this for you, read our guide to choosing an accountant).
2. What are the advantages of trading as a limited company?
Other than it being the most tax efficient way, with more tax planning opportunities than being self employed, perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability...
- Being Limited means essentially this protects the personal assets of the officers should the company run into financial difficulty.
- Many of the costs and administrative requirements associated with running a limited company are now not much more than those of a sole trader or partnership (it didn’t used to be this way but the Government has made huge strides in helping small limited business develop).
- Limited companies also instill added confidence in suppliers and creditors; many large organisations will only conduct business with limited companies.
- The ownership of a limited company can be easily divided up through the sale of shares.
- The shares can be further used as a means of generating capital i.e. selling shares in your company.
The tax implications of trading through a limited company as opposed to as a sole trader or partnership are quite complicated but we do have a great page for sole trader or limited companies that we would recommended you read. Having a limited company for some is viewed as an "insurance policy", especially for a new or high risk business, ensuring that you do not risk your personal assets on a speculative venture.
In addition to limited liability, a limited company has the following advantages:
- You can give a share of the business to others, e.g. family, but if they receive dividends you’ll need to be able to justify the work they do if investigated by HMRC as every time you make a dividend payment (you can make these whenever you wish) they will also receive a percentage. For example husband and wife: if the wife has 80% and the husband has 20% and they draw a dividend of £1,000 the wife will receive £800 and the husband £200.
- It may be easier to attract people to invest money in your business.
- Obtaining bank loans may be easier.
- In the event of a partner leaving, it is easier to continue the business.
- Limited companies offer better tax planning opportunities – for example every penny you earn in a tax year as a sole trader will be taxed that year, however with a limited company you can store money in your company and take in future years.
- It is easier to sell the business.
- You have a better standing in the public eye.
- It can assist in the protection of a name.
- People have more confidence in your business as they can check up on your company, on the public records, on Companies House.
- Contractors and Freelancer's may find it easier to obtain work.
3. Who can set up a limited company?
Any individual of any nationality may register a limited company subject to a few conditions:
- They have not been restrained by court order.
- They are not subject to UK Government restrictions.
- They are not an un-discharged bankrupt.
However, if you also require a UK business bank account you may find this difficult if you live somewhere else.
4. What kind of accounts and records must a limited company maintain?
All companies are required by law to keep a full record of income, expenditure, assets and liabilities. These records must be kept safe as they will assist you and your accountant when submitting company’s annual accounts. Visit the following page to download our free bookkeeping software.
5. When will I need to charge VAT?
You will not need to charge VAT to any of your goods or services until you have reached the VAT threshold amount of £70,000 (As of 1st April 2010)or if you expect it to reach £70,000 in the next 30 days then you must register for VAT.
Once over the threshold amount it is mandatory that you immediately register for VAT, and start charging interest to your goods and services from the day you registered. As a limited company there are various schemes that may work best for your business. Visit the following pages for more information:
6. Do I have to submit any documents annually?
Yes- you must provide a number of documents following your “Annual Reference Date” (ARD). This date is usually the last day of the month your company was incorporated and occurs each year, it is the date that your financial years ends where the accounts are not made up. You have 9 months from your ARD to return the following documentation to the Companies House.
- Abbreviated accounts- the deadline is 9 months and 1 day from the year end.
You will also need to submit the following documents to HM Revenue and Customs:
- Full accounts.
- CT600 – This is a corporation tax return, the deadline for payment for corporation tax is 9 months and 1 day from the year end.
Plus you’ll have to make a few submissions here and there to HMRC every so often; however most things are fairly straight forward and your accountant will help you at every stage.
7. Do I need a company secretary?
No. Since the 6th April 2008, it is the choice of the limited company director whether or not to have a company secretary. It is no longer a mandatory requirement, most new single person companies don’t have one as there is no work for them.
8. What information do I need to set up a limited company?
To set up a limited company you will need...
- A company name- visit SJD Accountancy's Company formation name checker page to check availability.
- The company address (most people use where they live), a registered address (if different from company address) and the Director’s basic details such as title, name, date of birth and nationality.
- Total number of shares and shareholders - as a standard procedure we recommend that as a single person limited company you allocate yourself one share.
You can complete this process through our parent company SJD Accountancy: Limited Company Formation page.
The formation is £125 plus VAT and includes the following:
- Help on organising a Company Bank Account.
- Easy Accountancy, along with most accountancy firms, recommends Cater Allen due to their history of good customer services and more importantly, their ongoing pledge to provide free business banking.
- Registering the Company for VAT & PAYE (some companies charge as much as £100 for each of these).
- Advice throughout the process including the optimum share structure of the Company.
You will need to have some insurance but only to cover what's in your contract. We use a company called Caunce O'Hara who can be contacted on 0161-833-2100. Donna Beanland is our main contact who will be able to offer advice and give you a free quote, alternatively visit our Professional Indemnity Insurance page for more details.
9. Do I have to trade immediately?
No. Your company can remain dormant (non – trading) for as long as you wish, however you must file dormant account forms with both HMRC and Companies House along with an annual return form (Form AA02) with Companies House, again we can help you with this.
10. What if the company doesn’t take off or I no longer need it?
A Limited company that has not traded for at least three months can voluntarily apply for Companies House and HMRC to remove their company from their register. This can be done by filing a 652a form.
Hopefully the above information has helped give some clarity on some of the most common questions asked when trading through your own limited company. For more information or a general chat about your business plans please call us on 0500 234111 / 01442 275767.
You may also find the following pages useful: