This guide will tell you everything you need to know about starting a limited company and help you to understand some of the differences limited companies have from sole traders.
With a limited company set up, you get to define your brand, own everything you do, run your business in the most tax-efficient way, and pitch for work you wouldn’t be able to get as a sole trader.
If you are looking to set up a limited company for the first time or moving from a sole trader but don’t know where to start? Our step-by-step guide explains the process, from choosing a name to preparing your documents and registering your company.
What is a limited company?
A limited company is a type of business structure that limits the liability of its owners, also known as shareholders. In a limited company, the shareholders are only financially responsible for the amount of money they have invested in the company, rather than being personally liable for the company’s debts and obligations. This means that if the company experiences financial difficulties or goes bankrupt, the shareholders’ personal assets, such as their homes or savings, are protected.
Limited companies are required to register with Companies House, a government agency in the UK, and must follow certain rules and regulations, such as holding annual meetings and filing annual accounts. Limited companies can be either private or public, and they can be owned by a single person or by a group of people.
If you wish to form a limited company in Scotland Companies House Edinburgh will be the register. Northern Irish company, which is incorporated at Companies House Belfast and has a registered office in Northern Ireland. Limited companies are a company ‘limited by shares’ or ‘limited by guarantee’.
Why set up a limited company?
Registering and running a limited company involves more paperwork and accounting than a sole trader business or partnership, but this is offset with extra protections in terms of financial liabilities.
A limited company’s liability is just that: limited. Deemed to be its own legal entity, it can own property and assets, incur debts, sue and be sued but its finances are completely separate from the personal finances of its owners. This means that should the business fail, neither you nor the other owners can be held responsible for any of its debts. Unlike sole traders or business partnerships, a limited company is a good way to run a business without any risk to personal wealth or assets.
Ownership of a limited company is divided up into equal shares which are then allocated to each shareholder. A limited company can be set up by a single individual who will be the sole shareholder and company director, or by multiple shareholders.
Advantages of forming a limited company include:
- Liabilities such as debts or legal action are limited to the company. You are protected from going personally bankrupt in the event the business fails, apart from in some rare circumstances.
- If you plan to employ staff, it’s better to form a limited company and pay salaries via the Pay As You Earn (PAYE) scheme.
- Corporation tax on profits is lower than the higher rates of income tax that a sole trader will pay.
- As its own legal entity, it’s easier to sell the business later or to sell shares in the business to raise capital.
- A limited company is perceived as a bigger, more professional organisation, which is important if your clients are primarily other businesses or government organisations.
When should I change from sole trader to limited company?
There are several factors to consider when deciding whether to change from a sole trader to a limited company. One of the main advantages of operating as a limited company is limited liability, which protects the personal assets of the shareholders in the event that the company experiences financial difficulties or goes bankrupt.
This can be particularly important for businesses that carry a high level of risk or that deal with large sums of money. Limited companies also have the potential to be more tax-efficient, as they may be eligible for lower corporate tax rates and can claim certain tax deductions that are not available to sole traders. However, limited companies also have additional reporting and compliance requirements, such as the need to file annual accounts and hold annual meetings, which can be more time-consuming and costly.
Ultimately, the decision to change from a sole trader to a limited company will depend on the specific needs and goals of the business and the individual. It may be advisable to seek the advice of a professional, such as an accountant or solicitor, before making this decision.
Can I set up a limited company on my own?
Yes, it is possible to set up a limited company on your own, also known as forming a company as a sole director. However, there are certain steps and requirements that must be followed in order to properly register the company and comply with the law.
To set up a limited company on your own, you will need to:
- Choose a unique company name and ensure that it is not already in use by another company.
- Prepare and file the necessary documents, such as the articles of association and the memorandum of association, with Companies House.
- Appoint a company secretary (if required) and register for corporation tax.
- Register for VAT, if necessary.
It is important to note that setting up a limited company can be a complex process, and it may be helpful to seek the guidance of a professional, such as an accountant or solicitor, to ensure that everything is done correctly.
The 7 steps to setting up a limited company
Here are the seven steps to setting up a limited company:
- Choose a unique company name and ensure that it is not already in use by another company.
- Determine the company’s structure and decide on the number of directors and shareholders.
- Prepare and file the necessary documents, such as the articles of association and the memorandum of association, with Companies House.
- Appoint directors and shareholders, and issue shares.
- Register for corporation tax and VAT, if necessary.
- Set up a business bank account.
- Obtain any necessary licenses or permits to operate your business.
It is important to carefully consider each of these steps and seek the guidance of a professional such as a formation agent or accountant for clarity.
How to register a limited company
To register a limited company, you will need to follow these steps:
- Choose a unique company name and ensure that it is not already in use by another company. You can check the availability of a company name by searching the Companies House database.
- Prepare and file the necessary documents with Companies House. This includes the articles of association, which outline the company’s internal rules and regulations, and the memorandum of association, which outlines the company’s purpose and the names of the directors and shareholders.
- Appoint directors and shareholders, and issue shares. Directors are responsible for managing the company, while shareholders are the owners of the company and have a financial stake in its success.
- Register for corporation tax and VAT, if necessary. Corporation tax is a tax on the profits of limited companies, and VAT is a tax on the sale of goods and services.
- Set up a business bank account. This will allow you to manage your company’s financial transactions separately from your personal finances.
- Obtain any necessary licenses or permits to operate your business. Depending on the nature of your business, you may need to obtain certain licenses or permits in order to legally operate.
How much does it cost to register a company?
The cost to register a company will depend on the specific requirements of your business and the type of company you are registering. In the United Kingdom, it typically costs around £12 to register a limited company online through Companies House, the government agency responsible for registering and regulating companies in the UK. This fee includes the cost of filing the necessary documents, such as the articles of association and the memorandum of association.
However, there may be additional costs involved in registering a company, such as the cost of obtaining professional advice or assistance from an accountant or solicitor. It is also important to consider ongoing costs, such as the cost of maintaining company records and filing annual accounts, as well as the cost of any licenses or permits required to operate your business.
Overall, the cost of registering a company can vary widely depending on the specific needs of the business.
What taxes will my company pay?
As a limited company, your business will be responsible for paying various taxes, including:
- Corporation tax: This is a tax on the profits of limited companies. The current corporation tax rate in the United Kingdom is 19%.
- VAT (Value Added Tax): If your company’s annual VAT taxable turnover is more than £85,000, you will need to register for VAT and charge VAT on your goods and services. The current standard VAT rate in the UK is 20%.
- Employer’s National Insurance Contributions (NICs): If you have employees, you will need to pay employer’s NICs on their earnings. The rate of NICs will depend on the amount of earnings and the type of NICs being paid.
- Personal Income Tax: If you are a shareholder in the company and receive dividends or a salary, you will need to pay personal income tax on this income.
It is important to carefully consider the tax obligations of your company and to seek the guidance of a professional, such as an accountant, to ensure that you are paying the correct amount of tax. Failure to pay the required taxes can result in penalties and interest charges.
How long does it take to set up a limited company?
It is possible to form a limited company within 24 hours, as long as all of the necessary documents and information are prepared in advance and the process is completed online through Companies House, the government agency responsible for registering and regulating companies in the UK.
To form a limited company within 24 hours, you will need to:
- Choose a unique company name and ensure that it is not already in use by another company.
- Prepare and file the necessary documents with Companies House, such as the articles of association and the memorandum of association. These documents can be completed and submitted online through the Companies House website.
- Appoint directors and shareholders, and issue shares.
- Register for corporation tax and VAT, if necessary.
- Set up a business bank account.
- Obtain any necessary licenses or permits to operate your business.
It is important to note that while it is possible to form a limited company within 24 hours, it may take longer to complete all of the necessary steps and meet all of the requirements. It is advisable to carefully plan and prepare in advance to ensure that the process goes smoothly.
How will I get paid through my limited company?
As the owner of a limited company, there are several ways in which you can get paid:
- Salary: You can pay yourself a salary through your limited company, which will be subject to income tax and National Insurance Contributions (NICs).
- Dividends: If your company makes a profit, you can choose to pay dividends to shareholders, including yourself. Dividends are taxed differently from salary and are generally taxed at a lower rate.
- Expense reimbursement: You can also get paid through the reimbursement of business expenses, such as travel and accommodation costs. These expenses must be directly related to the business and must be properly documented.
It is important to carefully consider which payment method is most appropriate for your business.
Legal responsibilities of running a company
There are various legal responsibilities that come with running a company, including:
- Registering the company with the appropriate government agency and obtaining any necessary licenses or permits to operate.
- Complying with employment laws, such as paying employees the minimum wage and providing a safe and healthy work environment.
- Filing annual accounts and reports with the relevant government agency.
- Paying taxes, such as corporation tax and VAT, on time and in the correct amount.
- Protecting the company’s intellectual property, such as trademarks and copyrights.
- Ensuring that the company’s products and services meet relevant safety and quality standards.
- Adhering to consumer protection laws, such as providing accurate and truthful information about the company’s products and services.
It is important to carefully consider these legal responsibilities and to seek the guidance of a professional, such as a solicitor, to ensure that your company is in compliance with the law. Failure to meet these legal obligations can result in fines, legal action, and damage to the company’s reputation.
F.A.Q’s
How to set up a limited company
To set up a limited company in the UK, you need to apply to companies house with a £12 fee then submit your registration online. If you are unsure on how to do this you can use a company formation agent.
How much to set up a limited company
Companies house charge a £12.00 fee to set up a limited company. Company formation agents charge about £50.00 but the carry out all the legal paper work that is required for the formation.
How long to set up a limited company uk
The time that is required to set up a limited company in the UK from start to finish is about 24 hours.
Conclusion
In conclusion, starting a limited company can be a viable option for individuals or groups looking to own and operate a business. Limited companies offer the benefits of limited liability, which protects the personal assets of the shareholders in the event that the company experiences financial difficulties or goes bankrupt, as well as the potential for tax efficiency.
However, it is important to carefully consider the costs, responsibilities, and legal obligations involved in starting and running a limited company, and to seek the guidance of a professional, such as an accountant or solicitor, if necessary. Thorough planning and preparation can help to ensure the success of your limited company.
Lee Jones is a seasoned Business Finance Specialist with over two decades of invaluable experience in the financial sector. With a keen eye for market trends and a passion for helping businesses thrive, Lee has become a trusted advisor to countless organizations seeking to navigate the complexities of finance.