How to set up your own limited company

It is often said that operating under a limited company is one of the safest and most tax efficient ways to operate a business.  

If you’re unsure whether a limited company is right for your start-up, read on as we detail the full picture of forming and running a limited company. 

What is a limited company?

A limited company offers an extra layer of protection to working as a sole trader. If a limited company gets into trouble the owners are not liable for the company's debts. Shareholders may be liable for debts up to any unpaid share capital that they owe to the company, or if they have provided private guarantee.

There are two types of individuals listed in a limited company – shareholders and directors. Shareholders are the owners of the limited company. Directors are the employees that oversee the day-to-day running of the business. It’s possible for an individual to be a shareholder and a director. This is particularly common in smaller limited companies and can be referred to as a close company. 

Limited companies are legally obliged to file company accounts with Companies House. These annual accounts are visible on public record at Companies House. Limited companies must also complete a company tax return and pay corporation tax. 

Pros of operating a limited company 

• No liability 
  Your exposure to company debts is limited as the company is a separate legal entity. 
• Borrowing 
  Banks are often happier to approach limited companies with finance.
• Credibility
  Some clients and businesses may be more willing to work with you as a limited company. 

Cons of operating a limited company 

• Administration 
  Greater level of admin burden in dealing with HMRC and Companies House.  
• Privacy
  Certain details must be made available to Companies House so company accounts and shareholder details will be available for the public to view.  
• Transactions with the business owner 
  Taking money out of the company must be dealt with very carefully to avoid an overdrawn director's loan. 
• Director’s responsibilities 
  Directors have many responsibilities and can get into trouble if they do not behave correctly. 

How to create a limited company

If you are planning on creating a new limited company, make sure you follow these eight simple steps: 

1. Make sure a limited company entity is right for you 
   If you are unsure what a limited company is and whether it’s the right business structure for your start-up, it’s always best to double-check. Speak to your accountant first as they will be able to help you make the decision on your financials. 
2. Choose a business name 
   You cannot use anything offensive or explicit. Your chosen name cannot be close to an existing business’ name or trademark as this could incur legal action. 
3. Choose the directors  
   The directors are the individuals that will oversee the day-to-day running of the business, some examples are a managing director and finance director. A company secretary used to be a mandatory requirement, but this is no longer the case and is now optional. 
4. Choose the shareholders 
   Typically the business owner(s) are the shareholders of the limited company. However, you may wish to include other business partners, family or friends as shareholders too. 
5. Identify people with significant control 
   Individuals with significant control are those with voting rights within the limited company. Those with over 25% of shares in the business, these are automatically considered people with significant control and must be recorded with Companies House. 
6. Prepare legal documents explaining how you will run and look after the company 
   The formal name of these legal documents is the ‘Articles of Association’ or the ‘Memorandums of Association’. They are the rule book of the company that directors and shareholders must adhere to. 
7. Check what records you need to keep 
   Limited companies should keep a copy of their incorporation certificate, which states your limited company name and registration number. You should also keep your legal documents, as well as bank statements, invoices etc. 
8. Register your company 
   Registration of a new limited company is made formally through Companies House. You must provide an address which will be on public records. You should also register your company with HM Revenue and Customs (HMRC) too. 

What are the responsibilities of a limited company director? 

As a director of a limited company, you must oversee the following tasks: 

• Follow the company’s rules, as shown in its articles of association 
• Keep company records and report changes 
• File your accounts and your Company Tax Return 
• Tell other shareholders if you might personally benefit from a transaction the company makes 
• Pay corporation tax 

Limited companies and corporation tax

We’ve already said that corporation tax is a key responsibility of any limited company and its directors, but what does it entail? 

Corporation tax is paid by all profit-making limited companies across the UK. It is a tax on annual profits earned in a tax year, paid in the same way as income tax for PAYE employees and sole traders. 

Salaries and dividends from limited companies

As a director of a limited company, you are treated as an employee for the purposes of taxation. This means you can take a salary from the company and even benefit from doing so. 

As a shareholder of a limited company, you are entitled to receive dividends from the company. It is possible to receive a director’s salary and shareholder dividends simultaneously. 

Paying yourself a salary

Any salary paid to directors is deductible from a limited company’s profits, thereby reducing its corporation tax bill. The company will receive corporation tax relief in the period that this is paid. 

The salary must be paid to directors via the Pay As You Earn (PAYE) system. This salary will contribute to a director’s UK personal allowance, which is the amount an individual can earn before paying income tax.

Beyond this amount, director salaries are subject to income tax, depending on which income tax band you are in based on how much your total income amounts to.

As well as income tax being due on your director’s salary, there is also National Insurance Contributions (NICs) to consider.

Company benefits

If you take benefits from your limited company, you will also have to take these into consideration. Benefits will include work cars, mobile phones, employer pension contributions. 

Typically, these are taxable at the income tax rates, although some company benefits are exempt from tax. 

For example, a work mobile phone provided to an employee, without a restriction on private use, is a tax-free benefit providing only one phone is supplied. Employer pension contributions are also exempt from taxation. 

Company dividends

Limited company dividends can only be paid to shareholders when the company makes a profit or has profit reserves. Inidividuals may be eligible for the dividend allowance meaning some or all their dividend income is tax-free. The remaining dividends you receive are taxed at the dividend tax rates.

Director’s loan account 

A director’s loan account is created when a director takes or pays money into the company. The money taken is not considered a salary or dividend. Nor is it money you’ve previously paid into or loaned the company. 

There may be tax implications depending on whether you owe money to your company and are considered overdrawn, or indeed if the company owes you: 

Overdrawn 
If you owe money to your company, your company must pay S455 tax if you don’t repay it within nine months of your year end. 

The company owes you 
If your limited company owes you, you can charge your company interest, but remember it will be taxable on you personally. 

Allowable expenses for limited companies

When it comes to claiming expenses for your limited company, these expenses must be incurred wholly and exclusively for the day-to-day running of your business. 

You cannot claim for expenses that have a dual purpose for business and personal use. 

It’s best to pay your business expenses through your company’s bank account. Alternatively, you can reclaim the costs of business expenses paid by you and be reimbursed via your company. 

Filing deadlines for limited companies

There are multiple filing deadlines to remember when it comes to maintaining your reporting and tax obligations as a limited company. Find out more in our article lookingat Key dates limited companies need to know.

How we can help

If you are planning on starting a business and are unsure whether a limited company is the most suitable structure, speak to our friendly and experienced team at TaxAssist Accountants.  

We can discuss your unique circumstances and undertake a thorough risk assessment to help you decide the best way forward for your business – limited or otherwise. 

For a free initial consultation call us today on 01324 217 050 or make an enquiry via our online contact form. 

Last updated: 8th August 2024