Having made the decision to be your own boss, it is important to decide the best legal and taxation structure for your business. The most suitable structure for you will depend on your personal situation and your future plans.
In this blog, we take a look specifically at what is involved in running your business as a Limited Company.
What is a limited company?
A private Limited Company is a type of business where the finances of a limited company are separate to the individual shareholder’s and director’s finances. Meaning that everything that the company owns, owes, or earns, is totally separate from the personal assets of the business owners.
Limited companies are subject to tight reporting and financial responsibilities and the directors of the limited company have their own duties and responsibilities as outlined below.
Businesses that set out to make a profit usually form a company which is limited by shares. The shares are owned by the shareholders (who can be individuals, another company or an institution), who must own at least one share of the company.
A shareholder invests money in the company by buying shares and has the potential for sharing in the profits of the company. The liability of shareholders is limited to the value of their share capital (including any unpaid part).
The shares issued to the shareholders are decided upon and noted in the Memorandum of Association which is the initial document setting up the company.
The type of shares or the ‘class’ is recorded together with what rights the shares give to each of the shareholders. This could be the amount of dividend to be paid, if the shares can be redeemed (exchanged) for cash, if the share gives a right to vote on company matters and how many votes each share receives.
Dividends are paid from the profits of the company once the tax liability has been met.
Dividends can be paid at a different rate on the different types of shares issued by the company and can be paid as an interim dividend in advance of the final profits being established, however, it is a legal requirement for the profits of the company to be sufficient to pay these dividends after allowing for the corporation tax liability.
Dividends are income for the shareholders and are subject to the shareholders individual tax rates, depending on the shareholders own individual circumstances.
A limited company normally provides limited liability which literally means that any liabilities, such as debts, are limited.
If a shareholder’s shares are fully paid, they cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.
A company will enjoy legal continuity as it is a legal entity in its ownright, separate from its owners (the shareholders). It can own property, sue, and be sued.
A director can be involved from the start in establishing a new business or appointed to the Board of a company. A director is an officer of the company with extensive legal responsibilities.
The Companies Act 2006 sets out a statement of general duties. The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.
The Act outlines seven statutory directors’ duties:
You may find that operating as a limited company is more tax-efficient than as a sole trader. This is because of the differences in how sole traders pay tax and National Insurance, compared to taxation for a company and its directors and shareholders.
For the directors of the company who receive a salary, it will be necessary to register for a Pay As You Earn (PAYE) scheme and the payments made will need to be considered for deduction of PAYE tax, National Insurance contributions (NICs) and pensions auto-enrolment.
If the company employs staff members, they will be paid on a regular basis and along with PAYE tax, NICs, and pensions auto-enrolment deductions from their wage the company as an employer will potentially be required to pay an employers’ NIC and pensions auto-enrolment contribution.
The company directors and employees of a Limited Company are able to receive benefits-in-kind from the company (for example company cars and private medical insurance). Most benefits are subject to income tax and the company will have to meet an extra charge of NICs on the value of the benefits.
How do I know if a Limited Company is the best option for me?
If you’re still not sure whether operating a limited company is the right option for you, we can help!
Get in touch with us today to discuss your plans so we can help to find the right business structure for you.