You’ve got an idea for an entrepreneurial venture, a passion to make it a reality and a plan of action to get it off the ground… Exciting times!
One of the most important steps in these early stages is deciding what legal structure to operate your business under.
It can seem a bit confusing at first, so in this article we’ll explain the ins and outs of setting up a limited company.
Should I set up a limited company or be a sole trader?
The structure you use to register your business will determine all sorts of important factors moving forward, such as how you report your earnings and pay taxes.
When it comes to figuring out the right structure for you, you’ll want to compare the pros and cons of setting up a limited company versus as a sole trader. These largely depend on your personal circumstances and what you need from the business.
In general terms, the main advantages of registering as a limited company instead of as a sole trader tend to include the legal separation between you and the business, and tax efficiency.
Clear financial division
A limited company is a completely separate legal entity to you as the owner, so the company’s finances (including any debts) are separate to your own. It means your personal assets and money are protected if the business doesn’t work out.
Sole traders, on the other hand, aren’t separate from the business, so your personal and business finances are treated as the same thing. In other words, if a sole trader business has debts, they’re your debts.
If you register as a limited company and the business finds itself facing any financial trouble further down the line, you can keep your personal finances and assets out of it. As a sole trader, your own money and assets might need to be used to resolve things like debt recovery.
Potentially more tax efficient
This partly depends on how much you expect to earn from the business, and how you want to pay yourself from it.
Because limited companies are separate to the owners, you can’t just keep the money that it earns. Instead, the company must submit a Company Tax Return and pay Corporation Tax on its taxable profits, then you’ll pay personal tax on the money that you take from the business for yourself.
Sole traders pay income tax on all their profits whether or not they take the money out of the business for themselves.
It’s also worth noting that the starting rate of Corporation Tax is lower than the starting rate of Income Tax (unless you’re in Scotland), and companies can claim tax relief on the salary amounts they pay.
Who can set up a limited company?
Generally, it’s a pretty straightforward process to set up a limited company in the UK and it is something that can be done by most individuals, or even entities, as long as there is at least one human director. That said, there are some rules and regulations you need to be aware of.
In order to set up a limited company in the UK, you must:
- Be aged 16 or over
- Have a registered business address
- Have at least one director and one shareholder – if it’s a private limited company they can be the same person
- Be able to pay filing fees
Who can be a shareholder?
Shareholders (sometimes also known as ‘members’) are the people or entities who own part (a share) of the company. Owning shares often means that you’re entitled to receive a share of the company’s profits and make decisions on the direction it takes.
There are few restrictions around who can and can’t be a shareholder, but they must be legally allowed to enter into shareholding. Shareholders (or members) generally tend to be founders, investors and/or employees. Somebody takes on shareholder status once a company gives shares to them or they purchase them themselves.
Who can be a director?
Rather like shareholders, there are few restrictions around who can be a director of a limited company in the UK.
As long as you’re aged 16 or over, not bankrupt, and not disqualified from directorship, you can be appointed a director. You don’t even have to reside in the country or be a UK national.
That said, it’s usually easier if a director is at least 18 years of age, making it more difficult for anyone else to challenge your contracts or decisions!
Can I be a director and a shareholder?
Yes, absolutely! It’s very common for companies to have just one person in the business who both owns all the shares as well as being the sole director.
Incorporating a limited company
To set up a limited company, these are the general steps you’ll need to go through:
- Decide on the legal name you will use to register your company. You can choose to trade under a different name if you want to
- Choose and assign your directors
- Allocate shareholders and any other people with significant control (PSC).
- Prepare your ‘memorandum of association’ and ‘articles of association’ – documents that detail how the company should be run
- Get all your financial information in order, including the details of company assets, inventory, loans, overheads, etc.
- Create a business bank account
- Register the business with Companies House.
Do I need to have an accountant?
It isn’t a legal requirement to have an accountant register your new limited company for you, and you can simply go through the process yourself if that’s what you’d prefer.
There are advantages to having an accountant though, including helping you to manage your deadlines and run your business as efficiently as possible.
Now all that’s left for you to do is get your new venture set up and registered so you can start focusing on growing your business. Best of luck!
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