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Setting Up Limited Company: What You Need to Know

Ready to set up a limited company but not sure where to begin? Worried about filing your company information on Companies House or managing your financial responsibilities? It’s normal to feel apprehensive when planning to set up a limited company – but it’s not as daunting as it seems.

This guide will discuss everything you should know about private limited company formation, including the important steps of setting up a limited company, the advantages and disadvantages of owning a limited company, how you might benefit from using an accountant for this business model, and much more.

How Can I Set Up a Limited Company?

There are a number of steps involved in setting up a private limited company, from deciding whether this type of business structure is right for you to ultimately registering your business on Companies House.

Follow the steps below to understand the exact process of setting up a private limited company from start to finish.

Step 1: Decide Whether A Limited Company Is The Right Choice

A limited company isn’t the only business model available. If you plan to be the sole owner of your business, you may prefer to register as a sole trader.

Sole traders don’t have to register their business information on Companies House, and their only financial obligation is annual self-assessment tax submission.

Limited companies, on the other hand, have greater financial responsibility, and their accounts must be publicly available on Companies House.

However, there are many advantages of owning a limited company. For instance, limited companies are separate legal entities to their company directors, which means that if things go wrong, the company itself is liable, rather than you personally. You won’t lose your personal assets, only the things that were put into your business.

If you’re unsure which business model is suitable for you, it’s worth seeking professional advice before proceeding.

Step 2: Choose a Company Name

Limited companies registered on Companies House must end with “Limited” or “Ltd”. Other than this, you’re free to name your business whatever you want – as long as it isn’t already taken by another company.

To see if a business’ name is already in use, use a domain checker or search the name on Companies House. Even if your preferred company name already exists, you may be able to name your business something similar. 

Keep in mind that Companies House doesn’t allow offensive or sensitive company names.

Step 3. Choose Your Directors

Unlike a sole trader setup, a limited company can have multiple owners or directors. This isn’t essential – though, of course, your business will require at least one company director.

You can appoint as many directors as you want – there is no current limit. However, a company director must be over 16 and should have financial or legal responsibilities within the business.

Gov.UK has outlined the responsibilities of a director, which include:

  • Following the business’ rules, as per its articles of association
  • Using experience, skills and judgment for the success of the company
  • Making decisions that benefit the company
  • Keeping accurate company records
  • Filing company tax returns and paying corporation taxes
  • Submitting a personal self-assessment tax return annually

 

If found to be avoiding these responsibilities, a company director may be issued with a fine or a penalty from HM Revenue or even prosecution. Hiring a good accountant is strongly advised if you need help with the financial side of running a limited company.

Step 4. Select Your Shareholders

As well as at least one director, your limited company also requires at least one shareholder. Your company’s directors can also be its shareholders.

Shareholders are the owners of the company. If you’re the only shareholder of your company, you own 100% of the business. Again, a limited company can have an unlimited number of shareholders. The more shareholders your business has, the smaller the portion of the company each shareholder will typically own.

It’s important to note, however, that you can split your company shares unevenly. Your shares don’t have to be equal if that doesn’t suit your business setup.

As well as shareholders, you need to establish your Persons of Significant Control (PSC). These people have more than 25% of your company’s shares and more than 25% of voting rights. Persons of Significant Control are also entitled to remove or appoint most people on the Board of Directors.

Step 5. Prepare Articles of Association and a Memorandum

Before officially setting up a limited company, you must prepare several legal documents: a memorandum of association and articles of association.

A memorandum of association is a document that all your shareholders should sign. It’s essentially an agreement to form your business and will be automatically created when you register your business online.

Articles of association are a set of rules about business operation. Your company’s shareholders and directors should agree upon these rules. Whether you create your own articles of association or use a model template is up to you.

Step 6. Keep Company Records

From the moment you start your limited company – even before you officially register on Companies House – you should get into the habit of documenting important information about your business.

Though many of us would rather not meticulously keep track of our finances, keeping accounting records are unavoidable for limited company owners.

You can be fined up to £3,000 by HMRC if you fail to keep accounting records at all, and you may even be disqualified from your role as a company director. With the new Making Tax Digital laws in place, it’s now even more important that you prioritise enough time every month for your accounts.

You should set up a business bank account for your limited company if you haven’t already. This will make it easier for you to keep track of your company’s incoming and outgoing payments.

Some of the financial records you will need to keep are the following:

  • Information about company debt
  • Assets owned by the company
  • Stock owned by the company
  • Record of all goods bought and sold

Additionally, you will need to file an annual return for your company. This will require financial calculations regarding profits and turnover. Keeping accurate monthly financial records will make it quicker and easier to file your tax return.

Step 7. Incorporate Your Company

Once you’ve taken the above preparation steps, you’re ready for company formation. Apply to register your company on Companies House, including your company name and a registered office address/ service address (keep in mind that this will be visible to the public, so you may not want to use a residential address), and a SIC code (or standard industrial classification code, which codes the area of business that you trade in).

You will also need to provide a “statement of capital” when registering your company. This is a description of your company’s share structure.

It costs as little as £12 to register your business on Companies House. If you’d rather register your company through an accountant or incorporation agent, that’s possible, too. 

Is It Worth Setting up a Limited Company?

If you’re starting your own business, you’re legally required to submit your annual accounts and pay your taxes. This means you need to choose at least one business structure, whether that’s a sole trader formation, a partnership, or a limited company model.

What makes it worth setting up a limited company? For one thing, your clients will perceive you to be more professional and trustworthy, which is a big bonus if you want to drive sales. Running a limited company also enables you to legitimately pay less tax than you would as a sole trader.

Because limited companies are distinct entities from their directors, everything from the business bank account to company tenders and contracts are all considered separate from the directors and shareholders. Limited company directors have limited liability, which means they won’t be personally liable for any debts or financial losses held by the company.

Because of this limited liability and distinct separation between the company and its shareholders, it’s also easier to get funding for a limited company.

In short, there are lots of reasons that make it worth the while to form a limited company and deal with the financial admin that comes with it. However, if you are starting a new company, it’s important to consider your needs and preferences before choosing a business structure. Just because limited companies have their fair share of benefits, it doesn’t mean they’re right for you.

What Taxes do I Pay as a Limited Company?

There are a number of tax contributions that you will need to make as a limited company owner, including:

  • Corporation tax
  • VAT, or Value Added Tax
  • Directors National Insurance (NI) contributions
  • Your personal tax payments

Let’s look at these tax contributions in more detail and how much you’ll need to pay for each.

 

Corporation Tax

The main tax that your limited company will need to pay is corporation tax. Limited companies aren’t required to pay national insurance or income taxes; instead, they pay corporation taxes on their business profits, minus any applicable expenses, including salaries. Corporation taxes are applied before company dividends are withdrawn. 

The rate for corporation taxes can fluctuate. Presently, it is 19%. This 19% could look very different from one business to the next, depending on your business’ profits. For instance, a company that earned £100,000 profit minus salary and expenses would have to pay £19,000 taxes, while a company that earned £50,000 would pay £9,500.

Limited companies need to pay their corporation taxes annually, within nine months, and one day after the end of the accounting period. You can choose when to set your annual accounts period, but it’ll remain the same every year once you have set it.

VAT

VAT doesn’t apply to all limited companies. If your company has an annual turnover of more than £85,000, you must be VAT registered. This means you must charge VAT to your customers on all products or services you sell. You can, however, reclaim any VAT that you have paid on purchases and business expenses.

You will need to pay your VAT bill quarterly from the date that your company registered online. Any monies owed to HMRC will need to be paid within 37 days of the end of each quarter.

Directors NI Contributions

Depending on whether you’re a sole trader, an employee, or a company director, you will need to pay a specific type of NI contribution.

As a director of a limited company, you’re classed as an employee. This means you will need to pay NI on your annual income from a salary (including bonuses) that exceeds £9,568. These contributions are calculated annually.

Personal Taxes

Finally, company directors will need to pay personal taxes on their salary from the business bank account.

You will be taxed on your dividend payments and need to pay income taxes and capital gains. This is where it gets complicated, and many limited company owners choose to outsource their taxes and accounting responsibilities to a professional accountant.

You should file and pay your taxes by 31 January annually. You will also need to make payments on account based on your current year’s tax bill.

What are the Advantages and Disadvantages of a Limited Company?

It’s worth knowing the pros and cons of operating a limited company, especially when compared to registering as a sole trader.

The advantages of a limited company are as follows:

  • The business and its shareholders are separate entities. Your company will have its own business bank account, and any tenders, contracts, and legal disputes will be the business and not your own.
  • Limited companies can be more tax efficient. As a director of this type of company, you will usually take a small salary, and the rest of your income will come from dividends, which you don’t need to pay NI on.
  • Your personal assets are protected. Because you have limited liability, your assets won’t be at risk if your company gets into debt. A sole trader, on the other hand, can be held personally liable for business debts.
  • More credibility. Customers and suppliers will feel confident buying from or selling to your company, and many other companies prefer not to deal with non-limited businesses.

The disadvantages of a limited company are:

  • Bigger accounting responsibilities. As a limited company owner, you don’t only have an annual return to submit. There are several quarterly financial responsibilities for you to keep up with and numerous documents to produce, which take up a lot of time.
  • Your company details are available online. Details such as your registered office address/service address and various financial documents will be made available to the public on Companies House. If your registered office address is a residential address, you may want to consider using a PO address instead.
  • More complicated setup. Registering a limited company requires more steps than becoming a sole trader. While sole traders can register on HMRC almost instantly, registering on Companies House takes longer, and requires documents and details that will take some time to fill out.
  • Difficult to dissolve the company. Sole traders can simply quit their job and tell HMRC that they’ve stopped trading if they decide to go back into employment. Dissolving a limited company can be a lot more challenging. It costs money and is a lengthier process.

Do I Need an Accountant for a Limited Company?

Having an accountant isn’t a legal requirement for a limited company, but the majority of limited companies choose to work with accountants to reduce the pressure of monthly accounting duties.

Qualified accountants, like the team at Mazuma, can help a limited company manage their payroll, make accurate and timely personal/employee tax payments,  keep monthly accounting records, and much more.

Whether you choose to enlist in an accounts management service is your choice. If you believe you’re equipped to keep up with your company’s legal responsibilities alongside your day job, then an accounting service may be unnecessary.

However, most people find that the benefits of hiring an accountant to take the financial admin off their hands far outweigh the monthly cost.

When you sign up for Mazuma’s monthly accounting service, you can guarantee that your records will be accurate and extensive. You’ll also be able to free up your own time and focus on aspects of running your company that you enjoy. Accountants can even liaise with HMRC on your behalf.

How can Mazuma Services for Limited Companies help you?

If you’re in the process of limited company formation, Mazuma can work with you to make sure you have everything you need to get started.

Getting registered in England as a limited business can be daunting if you’ve never had to do it before. Mazuma can help you form your company and keep on top of your monthly accounts, allowing you to focus on the day-to-day aspects of trading.

If you’re looking for an accounting service that will do the hard work for you, Mazuma is a great fit. We understand that operating a limited company comes with enough responsibilities without taxes and accounts to deal with. Our qualified accountants will log your important documents using our online software, ensuring your VAT and annual return are paid accurately and on time.

Setting up a Ltd Company - In Summary

Now that you know the important details about starting a limited business, it's time to decide whether it's the right choice for you. Remember, you can seek advice from a professional if you're still uncertain. There are many benefits to owning a limited company, but it's essential not to neglect your monthly accounting duties - or you could end up paying a hefty fine to HM Revenue. It's not always obvious what you should pay and when so many companies outsource their finances to an expert. Keen to learn more about how Mazuma's monthly accounting service can streamline your limited company's financial duties? Request a free quote and get started today.

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