What is a limited company?
There are two types of limited company – those that are publicly traded on the stock market (known as a public limited company or plc) and those that are privately owned (identified by the abbreviation Ltd at the end of their name). It’s highly unlikely you’ll be starting life on the stock exchange so we’ll concentrate here on limited companies.
A limited or limited liability company is very different from a sole trader. If you’re a sole trader or partner, you can be held personally liable – outstanding debts can be met from your personal assets.
Registering and running a limited company requires more legal administration than a sole trader business or partnership. However, while the business owner is personally responsible for any debts incurred by a sole trader business, a limited company is a separate legal entity to the company directors. Profits and losses belong to the company, and the business can continue regardless of the death, resignation or bankruptcy of the shareholders or people who run the business.
Limited companies pay corporation tax on their profits and company directors are taxed as employees in the same way as any other people you employ to work for the company.
Your personal financial risk is restricted to how much you invested in the company and any guarantees you gave when raising finance for the business. However, if the company fails and you have not carried out your duties as a company director, you could be liable for debts as well as being disqualified from acting as a director in another company.
Responsibilities of limited company directors
As a limited company director, you will be tasked with a number of responsibilities, which sole traders do not have to concern themselves with.
You must produce annual company accounts, submit an Annual Return (AR01) each year, and keep Companies House informed of any changes to the company (such as director, or address changes).
It is the directors responsibility to ensure that any legally required documentation is submitted on time, and all tax liabilities are paid to HMRC on time.
What is Corporation Tax?
When you set up in business via a limited company, your annual profits will be subject to corporation tax.
Dealing with your corporation tax affairs is one of your accountant’s key tasks, however ultimately the company directors are responsible for ensuring that the corporation tax liability is accurate, and your annual tax return is filed on time.
Registering your new business
You are legally obliged to inform HMRC that your company has been formed after you have completed the incorporation process.
Once you appoint your accountant, you will often need to fill in a form authorising your accountant to deal with your tax affairs on behalf of your new company .
Sole traders are not liable to pay corporation tax. The self-employed pay income tax via the self-assessment process.
Corporation tax self assessment
Each year, your company is required to complete a corporation tax return (Form CT600). From 1st April 2011, all returns must be filed online (for any accounting period ending after 31st March 2010).
Although your accountant will prepare and submit the CT600 and supporting documents, you must ensure that the information is correct, and you must also pay the liability electronically.
Each return must contain your company name, registration number, the registered office and tax reference number. You will find this on the notice to deliver a company tax return.
Most businesses have a 12 month accounting period, although it is possible to set a shorter period. Your accountant can also apply to change your year end date so that it ties in with other statutory deadlines.
What are the corporation tax rates?
There are 2 rates of corporation tax, and apply according to the level of profits made by a company.
In the 2012/13 tax year, you will be charged 20% on profits of up to £300,000, the ‘small profits rate’. The main rate is 24% on profits of £1.5 million and above.
For companies that make profits between £300,000 and £1.5 million, you will pay marginal relief, to make it easier for them to move from one rate to the other.
Keeping tax records
By law, you must keep all company records for at least 6 years, and it is probably sensible to maintain your records for longer if you can afford the space! Records include all receipts, workings, invoices, and tax-related paperwork.
You need to keep all of your records for at least six years, and some would argue it’s sensible to keep them longer than that. This includes all receipts and invoices, plus the record of all sales and purchases made.
Deadlines and penalties
Your accountant can submit your CT600 return any time between the date of your company year end your statutory filing date. This is typically the latest of 12 months after the end of your year end, or 3 months after you get a notice to deliver a return.
Unsurprisingly, if you submit your return late, or the contents are inaccurate, you – and not your accountant – will be charged a penalty.
If your company is liable to pay any corporation tax, you must settle the balance by 9 months and 1 day after your normal due date. For example, if your year end was 31st December, then your payment will be due on 1st October in the following year.
Advantages of a Limited Company
The obvious advantage of a Limited Liability Company is the financial security that comes with business. As already mentioned, the Company’s shareholders will only be liable for any debt the company accrues according to the levels of their own investment and no more. This can provide a comfortable feeling of security for investors in the Company.
Due to its very nature, a limited company is deemed to be a separate legal entity from its owners. This has several advantages, including the fact that the company will exist beyond the life of its members. If they retire or die, the company will continue to exist and operate. This ensures security for employees and other members and also is an advantage which other legal forms of business are not subject to.
Taxation and Tax Advantages
Limited Companies are only taxed on their profits (usually at a rate of 20%) and as such are not subject to the higher (personal) tax rates placed on sole traders or partnerships which can reach 45%. There are ways to use the limited company form to benefit the members/directors and their interests. If you are forming and running a limited company, you are recommended to pay yourself at minimum wage levels. This allows you to take advantage of the fact that the personal allowance level is £8,105. So you are required to earn over this amount before you will pay income tax on it. When you consider that income tax rates are:
20 % on earnings up to £34,370 and;
40% on earnings over £34,370 and;
50% on earnings over £150,000.
Then you can see the advantage of paying yourself in dividends instead of in the form of a pay packet (in the normal sense), especially when you consider that tax on dividends is only 10% and there are no NI (national insurance) charges on them! There are complexities involved where you wish to pay a pension for your retirement, but if you consider that dividends can be paid at any time during the company’s financial year (as many times as you like) it actually makes this method of paying yourself (and other members) more preferable. It also gives you further incentive to work hard to make a profit with the company, as dividends payments are made up of distribution of the company’s profit.
Not Using a Company Car
Many people take pride in their company car. However, as the owner of a limited company, you are actually better off not purchasing and running a company car, but instead using your own personal car for business purposes. In this way you can charge the mileage accrued on business travel to the company which allows you to benefit from tax free fuel and the costs are actually tax deductible to the company, so you benefit in two ways.
Using Your House
Starting out as a small company, you may not be able to afford to lease or buy premises to run your business from. The good news is, you can run the business from your house and claim back for the cost of doing so. If you use 1 room in your home for business purposes then you have to calculate the cost of that room by working out the costs of the house in general (water, electricity, heating, council tax and rent or mortgage interest (not the mortgage payments themselves)) then dividing that number by all the rooms in the house to give you the amount you can claim back.
Ownership and Control
In the case of Private Limited Companies, the Directors are also usually the main shareholders of the Company. Thus both the ownership and control of the business remain in their hands. Decisions can be made quickly and easily, with little fuss, allowing for a more successful business management platform.
Part of registering a Limited Company, includes the registration of a Company name. This name will help identify the business in the marketplace, separating it from other Companies and protecting it.
In some instances employees can purchase shares (or be granted shares via a company share scheme) and become shareholders of the company. This is good as it rewards the employee’s for their work, providing extra motivation beyond a mere salary. Not only will they have a vested interest in seeing the business succeed, but they will have a say in how it is run.
Disadvantages of a Limited Company.
There are more complex and restrictive rules governing the accounts and bookkeeping of Limited Companies than sole traders (for example). The Company is expected to produce years accounts incorporating a double entry format, balance sheets and other notes. With the (generally) larger nature of a Limited Companies business this can be a time consuming and costly undertaking.
- Formation of your limited company
- VAT and PAYE registration
- Quarterly VAT returns.
- Your annual personal tax return
- HMRC tax investigations service
- Monthly payroll service
- Annual Statutory Accounts
- Filing all statutory returns including Corporation Tax Returns.
- Dealing with all correspondence from HMRC & Companies House