You may be a sole trader who has made the decision to register your business as a limited company. This is a big decision, which contains many benefits and some drawbacks.
There are many steps to setting up a limited company, many of which are legal requirements. It's important that you properly register your company and maintain the right records; otherwise, you may find that your company encounters problems with HMRC. However, the steps aren't too complicated to follow, and many of them become second nature as you carry out day to day trade with your company.
In this guide, we'll look at the process of registering your own limited company, including the roles that need to be assigned within the business, the governing bodies that you need to register with and the benefits of incorporating your company.
Limited companies are a type of business structure that is legally distinct from the owners and directors. This means that the finances of the company are entirely separate from that of the owners, and therefore they cannot be held financially accountable if the business goes bankrupt or accrues losses and debts.
There are two different types of limited companies: private and public. The main difference is that private companies cannot sell their shares to members of the public, whereas public limited companies can raise capital by selling shares to the public. Public companies must sell £50,000 worth of shares before they can begin trading.
Most larger and established businesses operate as public limited companies. However, both types of companies are able to own assets and keep the profits that they make after the necessary tax has been deducted.
Shareholders' only legal responsibility is their original investment, which means that this capital is the only money at risk. This is different from sole traders, as the company's and owner's finances are legally entwined. Sole traders are personally responsible for any losses or debts that the business has.
You are able to make various claims for business expenses through a limited company. This includes costs such as travel, accountancy fees and equipment that were solely bought and used for business purposes. Contractors can also use the Flat Rate VAT scheme, which means that companies pay HMRC a fixed amount of VAT each year and are able to keep the difference between what is paid to HMRC and what is paid by customers.
Limited companies also seem more credible to customers and suppliers as they are fully registered. Some individuals choose not to work with or buy from non-limited businesses because they may think they aren't as trustworthy.
Business owners have complete control over their limited company and don't have to risk money with a third-party or umbrella business. A limited company's name is also fully protected by law and means that other businesses can't trade under the same or a very similar name. This is still the case, even if the company is not currently contracting. You can also protect your company's trademark by registering it with the Intellectual Property Office.
Directors of limited companies also pay tax differently than if they were sole traders. Sole traders pay a minimum of 20% on everything that they earn over a set threshold. However, directors of limited companies will usually pay themselves a smaller salary, which results in less personal tax. Most limited company directors earn the majority of their income from dividends, which are taxed at a lower rate and means that the take-home pay can be maximised.
Limited company directors also pay lower National Insurance contributions, as they do not relate to dividends income. Their financial responsibility to the company is also capped by the number of shares that they have bought from the company. For example, you may invest £2,000 in shares and take out a loan for £5,000. If your company is unable to pay back the loan and interest, you would only be liable for the £2,000 that you had previously invested.
It costs £12 to register a company with Companies House online, which can be paid via credit or debit card. The company should be fully registered within 24 hours of the payment.
Postal applications cost £40 and can take between eight to ten days to be processed. The cheque must be made out to Companies House and accompany an IN01 form.
There are various steps to registering a limited company. You can register online via the government website, through the post, using an agent or using third-party software. All limited companies must register for Corporation Tax within the first three months that the business forms and starts advertising, trading, renting a property or employing anyone.
Companies that are limited by guarantee must have at least one guarantor and a guaranteed amount. A guarantor is a company member who controls the company and makes important decisions, and doesn't usually make a profit from the company's trading.
Choose a name
One of the first things that you need to do is pick a name for your company. Whilst this step does allow for creative freedom, there is a list of sensitive words that can't be used in the name of a limited company, such as 'royal', 'co-operative' and 'government'.
The word 'limited' will be added to your company name, although you can request that it isn't by registering through the post.
Select directors
The next step is to appoint a director. It is a legal step to appoint at least one director, although it is optional as to whether you appoint a company secretary or not. It is a director's responsibility to follow the company rules, monitor the company records and note any changes that are made and file the accounts and Company Tax Return on time. Directors must also pay the Corporation Tax and tell shareholders whether the director will personally benefit from a transaction that the company makes.
Accountants and other professionals can manage these day to day tasks, but it is the director's legal responsibility to monitor the company records, performance and accounts.
Directors can be fined, prosecuted or disqualified from their role if they are found to breach the company rules or fail to perform their duties properly.
Sell shares
All limited companies need at least one shareholder or guarantor, which can be the director. The majority of companies have 'ordinary shares', which means that directors get one vote per share in regard to company decisions. They can also receive dividend payments.
The director can be the sole shareholder of a limited company, which means that they will own 100% of the business. There is no limit on the number of shareholders that a company can have. it's also possible to limit the shareholders' liability by choosing a low share value (such as £1). Shares can be sold for any value, although shareholders must pay for their shares in full if the company were to shut down. The total value of the shares is the company's share capital, which doesn't take the company's total worth into consideration.
When registering the company, you must list the relevant information for the initial shareholders. This includes information such as:
- name and address of the shareholder
- number, type and worth of share that they have bought
Register with Companies House
All limited companies are legally required to register with Companies House, which will simultaneously register them for Corporation Tax. This process will earn the company a certificate of incorporation, which confirms that the company legally exists, along with the company's name and the date that it was officially formed. You can register your limited company online or through the post.
You will need to include three pieces of personal information for yourself and each of the shareholders or guarantors. This includes information such as:
- town of birth
- mother's maiden name
- telephone number
- National Insurance number
You will need to register for Corporation Tax separately if you are already registered with Companies House. This will mean logging into your HMRC online services account and filing your company tax return or making a payment.
All companies need to include their registered office address in their application, as well as pick a SIC code (Standard Industrial Classification of economic activities) which tells Companies House the type of work your business does. You must only use codes on the Companies House list. Otherwise, your application could be rejected.
It's important that you keep certain records about the company from the point of registration, including documents concerning the business accounts and finances. You must also keep note of the minutes from meetings, including the resolutions and changes that are planned. Companies House must be informed if you keep these records anywhere other than the registered office address.
You must keep receipts as evidence to show how much the company has spent in a financial year, as well as petty cash books, delivery notes and order notes. It's important that you retain invoices, contracts and other relevant documents such as bank statements for your business bank account.
Persons of significant control
All limited companies must keep records of the directors and shareholders, the results of shareholder votes, transactions of shares and loans and mortgages that are secured against the company assets. The records must also name people with significant control within the company, such as shareholders who own over 25% of shares or voting rights. They must also name people that have the power to appoint or remove directors or individuals that have significant control over the running of the company. You must make a note if there are no individuals within the company who have significant control.
Accounting
The legal responsibilities of all limited companies include keeping a record of the business income, assets and loans or debts. You must keep a record of all the money that the company receives and spends each financial year. The company can be fined £3,000 if HMRC finds that you have failed to keep these accounting records. You could also be disqualified as a company director if you haven't kept these records.
Stock
You must keep a record of the stock that the business owns, including the stock takings that are used to calculate the stock figure, the goods that are bought and sold, as well as the companies that you traded with (unless you run a retail business).
Employment records
Limited company directors can be either self-employed or employed within the business. There are certain records that you will need to keep if you are employed, including information about your pay, Income Tax and pensions. You will need to keep a record of your P45, P60 and other similar documents. You will also need to keep a record of tax reward schemes, as well as information about employee redundancy and termination pay.
You should also keep a record of employee business expenses, such as equipment, tools and uniform that may be able to claim a tax reduction on. Documents concerning benefits such as social security, statutory sick pay and maternity pay will also need to be recorded.
You will need to provide a registered office address during the company formation process. All written communication will be sent to this address. This is the case even if a third-party company handles your mail because the service that they offer must include forwarding your company's mail to your registered office address.
The company must have a physical address in the UK and be based in the same country that your company is registered. For example, the address must be in England if your company is registered in England.
You can have a PO box, but this must also include your physical office address and postcode. The address will be made publically available on the Companies House online register. This address cannot be removed from the online register. However, if you do not want the address to be made public, you can instead use a different address. This could include the address of the individual who will deal with the Corporation Tax, although you will need their permission first. You could also appoint an agent who will give you an address to use.