Limited Companies: Everything You Need To Know
So your side hustle or small business is going well, and you think it’s time to take it to the next level: forming a limited company.
It’s a step up from being a sole trader that can take your operation to new heights, but you need to know the facts before jumping in.
Feeling overwhelmed? We’ve got you covered. Here’s our guide to a limited company, the reporting requirements, and our top tips for running your shiny new company structure.
Let’s dive in.
What is a limited company?
A limited company is a corporate structure where the business owner is legally separate from the business itself. The company can therefore enter into contracts and be independent of its owner.
You can register a business with Companies House, where it will be assigned its company registration number. You can’t be cheeky and choose a name that’s too similar or the same as another already registered, but thankfully Companies House has a tool to check you’re not treading on any toes.
Once registered, information about the company, like who the director is and what the annual filings look like, is publicly available on the Companies House website. Congratulations, you’re now a limited company!
What are the benefits of a limited company?
If you’re on the fence about whether a limited company is the right move for you and your biz, here are some advantages that might sway you.
Tax efficient
Being the director of a limited company means you can pay less tax overall! As a sole trader, you pay personal income tax according to your tax bracket. Income tax rates can be as high as 45%.
On the tax front, it’s definitely a win. A limited company is liable for corporation tax set at 19%. If there’s a lot of profit in the company, you can issue dividends, which are taxed at a lower rate than personal income tax.
Limited liability
With a limited company, you’re only on the hook for debts of the same value as your original investment. The protection it gives you as a business owner can be a huge relief, as you aren't personally liable if you ever run into legal trouble or rack up debts.
If you’re a sole trader, you and the business are the same, so if you run into debt, you must pay it all back - eek.
Continuity
If your business grows and you want to take a step back from daily management, it’s easy to appoint new directors of a limited company.
That way, the business can continue without you directly attached, as the assets and company structure are separate from you as a business owner.
LTD versus PLC
There are different types of limited company structures with different rules and governance standards, so it’s worth getting to know these.
A private limited-by-shares company is where ownership is decided by the number of shares held by each shareholder. Each shareholder has the right to vote on important decisions in the business, like appointing new directors.
A private and limited guarantee company is similar to the above, except the shareholders give a guarantee for the company’s debts up to a certain amount. It’s typically used for non-profit organisations.
A public limited company (PLC) is when a company has grown successful enough to float on the stock market. The first time it’s taken public is called an Initial Public Offering, or IPO. After this happens, shares in the company are available for investors to buy in the hope the stock price will go up in value.
PLCs need to have a minimum of two directors in the company, hold AGMs and publish financial data on at least a yearly basis that’s publicly available. It’s a step up from running a private company!
Reporting requirements and how to submit
With any limited company, there are reporting requirements you’ll need to stick to. Every company must file annual accounts with Companies House, which a qualified accountant can help you sort. You have nine months after the year’s end to do this, so don’t miss the deadline!
HMRC will also need a corporation tax return each year to see your profits and calculate your tax liability. Some tax reliefs are available, so consult a professional to know how you can take advantage of them.
Finally, you’ll also need to submit a confirmation statement annually. A confirmation statement is a document that confirms essential details about the company, like who its directors and shareholders are.
It’s worth noting the Government is in the process of merging the Companies House and Gov.uk websites, so you’ll be able to sort everything in one government portal.
Worried about keeping track of everything? We can keep things running smoothly to give you peace of mind. You can schedule a consultation here.
What to consider when forming a limited company
When forming a limited company, first-timers must be aware of a few more things.
A Standard Industrial Classification (SIC) code is a five-digit number that categorises the type of business you’re in. A SIC code helps HMRC with their stats but, crucially, with what kind of taxes you should be paying as a business.
If you’re the only one in the business, then you’ll be the sole director, but if you want to expand or go in with a partner, you may wish to appoint yourself as a Person with Significant Control (PSC). A PSC is different from a director, as they have control without needing to worry about the day-to-day running of the business.
You’ll also need to pay for the administrative costs of running a business. There are fees to register, an annual fee for the confirmation statement and the cost of an accountant if you need one.
Tips on running a limited company
The last thing you want is HMRC checking out your late-night Dominos habit when they’re working out the tax your business owes! Having a separate bank account for your company is a dream for keeping things neat and separate - especially when filing accounts and taxes.
On that note, using specialist software can boost your efficiency even more by taking care of invoicing, accounting and project management as needed. QBO and Xero are great places to start as easy-to-use platforms.
But most importantly, don't let the technicalities of running a limited company dampen your excitement and passion for your business! You can ask an accountant to help with the tricky stuff so you can focus on what you do best rather than being bogged down in complicated admin and remembering deadlines.
Wrapping up
Forming a limited company might seem complicated, but with some planning and organisation, you'll be well on your way to building a business empire.
Whether you're a seasoned entrepreneur or just starting up, consider hiring a professional accountant or legal advisor to help guide you on the path to success.
At BXD Accounting, we’re experts in handling the complicated stuff so you can pursue your business dream. Want to hear more? Get in touch.