Limited Company – What do you need to know
- September 2021
- 5 minutes
Many small business owners form Limited Companies without fully comprehending the risks they are taking. Life as a sole trader is relatively straightforward. You and your business are one and the same. You have now created a separate legal entity from yourself when you form a Limited Company. They’re inexpensive and simple to set up in most cases but think of it like getting a puppy…it’s a big responsibility to take on, regardless of the initial cost!
As a director of a Limited Company, your responsibilities are outlined on this page.
The limited company’s money is not your money
As a sole trader, there is no significant difference between the money in your personal bank account and your business bank account (if you even had one). You can put money in and take money out as you please, because it is all your money.
However, this is not the case when you trade using a Limited Company. The Company is a separate legal entity to you and has its own money. It can also borrow money in its own name, though if you agree you could be required to offer a personal guarantee using a separate legal document (i.e. if the company cannot repay the debt, you will but that is not the default position as the limited company can become bankrupt or cease to trade without affecting your personal position).
If you own the company, you do, of course, indirectly own the money of the company. You therefore have significant control over what it does with its money…but care must be taken when withdrawing it. All expenses must be purely business related in order to qualify for tax relief otherwise, you would be personally liable for it and be required to pay personal tax on it.
When withdrawing funds, it must either be:
- A salary payment (attracting PAYE and National Insurance Contributions)
- A dividend (for which minutes of a board meeting and dividend vouchers must be drawn up)
- a loan (take care not to owe the company at the year-end…this can lead to further tax charges called S455 charge).
Taxes – Corporation and personal
Upon forming a Limited Company, there is a new tax at play – Corporation Tax. This is charged on the taxable profits of the company, at 19% (at present which is set to rise in the future), and is due 9 months and 1 day after your year end.
For small, owner managed companies, the owner will normally be in charge of the company’s remuneration strategy. It is therefore worth considering how best to extract funds from the company, whilst minimising and delaying both corporate and personal taxes as much as possible.
Paying yourself a high salary isn’t always the most tax-efficient way to do things. In addition to your personal tax rate (currently 20% or 40%), you will be subject to employee national insurance contributions of 12 percent on annual earnings between £9k and £46k, and 2% on earnings above that. Furthermore, the company will be subject to 13.8 percent employer national insurance contributions on all salaries over £9k. On the plus side, both the salary and the employer’s NICs are deductible for corporation tax purposes.
The most common option is to pay a dividend to yourself. This is not a tax-deductible expense for corporations (hence you will pay more corporation tax). However, they are exempt from paying national insurance and are typically taxed at a lower rate than salary (7.5 percent in the basic rate band and 32.5 percent after).
Taking a salary up to the NIC threshold (which attracts no personal tax/NICs but is deductible for corporation tax and also counts as a qualifying year for state benefits) and the rest as dividends is often the most tax efficient method. Remember there is no set rule that works for everyone because taxes are complicated, it is always a good idea to appoint a tax planner to work with you to ensure that your personal tax position is optimised even when circumstances change.
Salaries – what they are and what do they mean
The company is owned by the shareholders. Shares can be owned by multiple people, indicating that the company is owned jointly. The person who owns the most shares usually has the most say and is entitled to the most dividends.
There could also be multiple types of shares. This could be a variety of ordinary shares (for example, ordinary “A” and “B” shares), or it could be preference shares. We wouldn’t recommend it unless you have a compelling reason to do so. If not, the saying “Keep It Simple Stupid” applies.
The most common type of stock is ordinary stock. They usually have control over the company and a claim to the majority of the profits if it succeeds. They will, however, usually be the last in line to receive a refund if the business fails.
Preference shares are like a halfway house between ordinary shares and a loan. They are typically entitled to a set % preference dividend, based on the amount invested. These are payable before ordinary dividends. Therefore, if the company does extraordinarily well, the preference shareholders still simply get their X%/year return. If the company fails, preference shareholders will get their capital back before ordinary shareholders, but after any creditors (e-g normal loans and interest would be paid before preference shares and their “interest”).
As a director of a Limited Company, you owe a duty of care towards it. In particular you must:
- Only act within your powers – as granted by the memorandum and articles of association
- Act in the best interest of the company-using all knowledge available at the time.
- Avoid conflicts of interest-where unavoidable, disclose in full to the board
- Not make a secret profit-any personal gain made from the Company’s activities should be disclosed
- Exercise due skill and care- based upon your own special skills
- Keep up to date with all administrative tasks-including filing of accounts and tax returns
- Act in the interest of the creditors if the company may not be able to repay your debts-or you could become personally liable.
As director it is your responsibility to ensure all the correct documentation as required is filed with Companies House and HMRC on time. It is NOT the responsibility of your accountant, although of course they should assist you where possible and provide reminders to help.
Private Limited Companies must file statutory accounts with Companies House within 9 months of the year end to comply with the Companies Act. For small businesses, the penalties for missing these deadlines can be significant, so make sure you submit yours on time.
Only abbreviated accounts must be submitted if you are a micro/small business. These have fewer disclosure requirements, such as not requiring a profit and loss account to be shown.
Your confirmation statement must also be filed with Companies House. This keeps details such as the main shareholders and directors, as these are not always constant. There is a £13 charge to file this online.
Within 12 months of the year end, a CT600 (corporation tax return) and corporation tax computation, as well as a copy of the full statutory accounts (i.e., not abbreviated – must have a detailed profit and loss account), must be filed with HMRC. However, any corporation tax due is usually due 9 months and 1 day after the end of the fiscal year.
Depending on whether or not your company is registered for those taxes, you may also need to file payroll and VAT returns.
Forming a company is so easy, maybe £20 to an online company formation agent and it’s done. Unfortunately, many people don’t realise the responsibilities that come along with it. Limited Companies can be extremely useful, but don’t set one up until you’ve considered your situation fully and are sure it’s the right move. Of course, there are significant tax advantages and by appointing a firm like TaxQube Chartered Accountants, we can manage the requirements on your behalf whilst delivering you the tax benefits that come with the use of a limited company.