Whether your business has been operating for some time on a sole trader basis, or you are just getting started in business, setting up as Limited Company needs careful consideration. If you are looking for some practical guidance to get you started with the process, then look no further, as we have compiled an overview what you should consider and the steps you’ll need to take.
Business Structure – is a Limited Company right your business
When it comes to deciding how to structure a business, you have various options and just one of these is to form a Limited Company, whereby the business exists as a separate legal entity to yourself. Profits which are generated by the company, do not belong to you and as a result you must withdraw money as a salary, dividends or a loan to access an income from the business.
Forming a limited company provides the following benefits:
- There is no personal liability for financial losses
- The company name is protected by law
- Ownership of the company can be transferred more easily
- Potential personal tax savings (versus operating as a sole trader)
Alternatively, if you opt to set-up as (or continue as) a sole trader, you will have complete control of the business including access to all profits after tax. The set-up process for sole traders is also more straightforward, although the key disadvantage is that you will be liable for any financial losses the business encounters.
Type of Limited Company – PLC or LTD?
You have a couple options when it comes to setting up a Limited Company. You could set-up your company as a public limited company (PLC) or you could opt to set-up as a private limited company (LTD). To operate as a PLC, the business must have a minimum of £50,000 in share capital and at least two shareholders, two directors and a company secretary. It’s therefore likely, for most small businesses that they would opt to form a LTD company instead.
Naming and Registering your Limited Company
All limited companies must be registered with Companies House, and to do this you will need to register an official address and select a standard industrial classification of economic activities (SIC) code to identify what your company does. As part of this process, known more formerly as ‘incorporation’, you will obviously need to have chosen a name for your company and for this you should review the guidance provided by Companies House naming rules.
You will receive a ‘certificate of incorporation’ from Companies House once the registration process is complete and this document provides evidence that the company legally exists as well as stating the company number and date of formation. The online registration process is generally completed within 24 hours at a cost of £12. If you need to do the registration by post, you will need to use an IN01 form. Postal applications take up to 10 days to process and cost £40.
Registering for Corporation Tax
It usually makes sense to register for Corporation Tax at the same time as registering the company (although it is possible to do it separately) as you will need to do this within three months of starting your business.
You will need to provide HM Revenue and Customs with the following information:
- Your company’s unique registration number
- The date you started to conduct business
Once you have registered for Corporation Tax, you will be notified of the deadline for paying your Corporation Tax by HMRC and you will need to file a Company Tax Return, even if you make a loss or have no Corporation Tax to pay. If you do not register for Corporation Tax within the initial three months, you may face a penalty or fine.
Appointing a Director for your Company
All limited companies must appoint at least one director, and in most cases the business founder takes one of those positions. The director holds responsibly for company records, accounts and performance and their name/s and personal details as well as the service address are made available through Companies House. (Anyone who does not wish to disclose their home address publicly, can request that this information is withheld).
While the appointment of a director is a legal requirement, the decision as whether to appoint a secretary or not is up to the business. A company secretary can take on some of the legal duties which fall to the company director, but the role cannot be assigned to the company’s auditor or an ‘undischarged bankrupt’, and the individual must be at least 16 years of age.
Company Guarantor/s or Shareholder/s
Once a director has been appointed, the company is also legally required to select at least one shareholder or guarantor. Note that this could be the same individual as the director.
Shareholders contribute money to the company and in return they receive a percentage of ownership of the company in the form of shares, as well as holding other rights. Assuming that the company has multiple shareholders, you will need to determine the price of each individual share. If the company became insolvent, the shareholders would need to pay the full cost of their shares.
During the company registration process, full details regarding share value and shareholders will need to be detailed within a ‘statement of capital’.
An alternative structure often opted for by ‘not-for-profits’ due to the personal financial protection it offers, is a company ‘limited by guarantee’. In this case, profits are usually reinvested in the company rather than being distributed to guarantors.
The Companies Act 2006 requires that companies formed in the UK have both a ‘memorandum of association’ and ‘articles of association’.
A memorandum of association is a legal statement signed by all shareholders or guarantors who agree to form the company. If the company is registered online, a memorandum of association is created automatically, but if the registration is completed by post, it is necessary to use the government’s memorandum of association template.
‘Articles of association’ are a governing constitutional document that details how the company should be run and the information contained in this needs to be agreed by the shareholders or guarantors as well as the company secretary (if one exists). This document can be created either by using the ‘model articles’ as prescribed by the Companies Act 2006, or you can write you own when you register the company.
Retaining Limited Company Records
In addition to the formal documentation outlined above, it is also necessary to retain other records relating to the company, and this includes:
- Details of directors, shareholders and company secretaries
- Results of shareholder votes and resolutions
- Promises for the company to repay loans (including details of repayment date and to who)
- Promises relating to payments should something go wrong, and the company is at fault
- Details of company share purchases
- Details of loans or mortgages secured against company assets
Finally, the company must keep a register of ‘people with significant control’ (PSC), which includes details of individuals who:
- Have more than 25% shares or voting rights in the company
- Can appoint or remove a majority of directors
- Can influence or control the company or trust
The PSC register must be kept even if there are no people of significant control in the company.
Accounting Records for Limited Companies
It is also vital that important financial information and records relating to the company are retained for tax and accounting purposes. This usually includes the following details:
- company income and spend
- company owned assets
- company debts (as well as debt owed to the company)
- stock held by the company at the end of the financial year (and stocktaking’s used to calculate this figure)
- goods bought and sold (not necessary if you operate a retail business)
You will need to keep receipts, invoices and bank statements to support the records above. Further details regarding the financial records required for your annual accounts and tax return can be found on the Gov.uk website.
Accounting Support for your Limited Company
If you do not keep accounting records, then you could be disqualified as a company director or risk a fine of £3000 from HMRC. With this in mind, you may want to consider appointing an accountant to support you with the preparation of your accounts and annual tax return.
It is also advisable to use Making Tax Digital (MTD) compliant accounting software to stay on top of your accounts. This is particularly relevant for any company that exceeds the VAT threshold of £85,000, as they are now required to store their financial records digitally and submit their VAT returns via MTD compatible software.
If you need support or guidance in relation to setting up a Limited Company, preparing your annual tax return or any other aspect of managing your company accounts, please get in touch with the Kingston Burrowes team.