A Practical Guide to Setting Up a Limited Company
Starting your own company sounds fantastic. It’s a great way to take control of your workload, your timetable and your finances. However when it comes to the initial setting up of your business it can appear to be a complex task. We have set out below some of the main steps to creating a Limited Company to guide you in the initial stages.
Still unsure what type of company you should be creating? Then check out our previous post ’10 things to consider when working for yourself or setting up a company’. That article compares the key points of a Limited Company versus setting yourself up as Self-Employed.
A LIMITED COMPANY – WHAT IS ENTAILED?
As a quick reminder here are a few key aspects of a Limited Company:
- Its finances are separate from your personal finances, your liabilities are limited to what you put into your company, but there are more reporting and management responsibilities;
- You will be considered as an owner and employee of your company at the same time;
- You need to register your business with Companies House and with HMRC for Corporation Tax, Self-Assessment, and make annual reports for each area;
- All allowable business expenses are deducted before calculating Corporation Tax;
- As an individual you will pay Income Tax and National Insurance Contributions on the personal ‘salary’ amount only. There may be employers NI to pay also;
- 3 ways to draw money from the business 1) Salary 2) Dividend 3) Directors Loan. You can optimise this to make it the most tax efficient scenario for your circumstances.
SETTING UP A PRIVATE LIMITED COMPANY – IN 3 MAIN STEPS
There are three main steps that you need to complete when setting up a Limited Company, all of which can be completed online by yourself, or you can ask an Accountant, for example to organise it all for you:
1) REGISTER WITH COMPANIES HOUSE
To set up a Private Limited Company you first need to register with Companies House. This is known as ‘incorporation’. You need to do this before you start trading and you’ll need the following bits of information:
- A company name – there are rules on what it can and can’t include;
- An address for the company (where you will receive official documents);
- At least one director and at least one shareholder (yourself);
- The agreement of all initial shareholders to create the company – known as a ‘memorandum of association’;
- Details of the company’s shares and the rights attached to them – known as a ‘statement of capital’. You can set a company up with just one £1 share;
- Written rules about how the company is to be run – known as ‘articles of association’. You can adopt standard ones so you don’t need to create them from scratch.
- Details of people with significant control over your company, for example anyone with more than 25% shares or voting rights;
- Your standard industry classification – SIC code. This number that identifies what your company does.
- Once the company is registered you’ll get a ‘Certificate of Incorporation’. This confirms the company legally exists and shows the company number and date of formation. The company number needs to be included on all your stationary and promotional material e.g. website, invoices etc. The date will determine when you need to submit your first set of accounts (a year later).
- How to register: You can register online with Companies House if your company is limited by shares and if it uses standard articles of association (known as ‘model articles’) (this is most companies
2) REGISTER FOR CORPORATION TAX
You must pay Corporation Tax on profits from doing business as a limited company.
- Your company will need to register for Corporation Tax within 3 months of starting to do business.
- You need to keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
- You need to pay Corporation Tax and file a report even if you have nothing to pay, by your deadline. This is usually 9 months and 1 day after the end of your accounting period.
- You need to file your Company Tax Return by your deadline. This is usually 12 months after the end of your accounting period.
- Your accounting period is normally the same 12 months as the financial year covered by your annual accounts.
- How to register: You register for Corporation Tax online on the HMRC website.
3) REGISTER FOR SELF-ASSESSMENT
Self-assessment is a system HMRC uses to collect Income Tax if the tax is not deducted automatically from wages, pensions and savings as it is when you are employed by a company. Note the following:
- You will need to register for Self-Assessment with HMRC by 5th October, after the tax year in which you start trading;
- If you are employed by another company as well as setting your own company up you need to include the information from all employment when completing the return;
- How to register: You register for Self-Assessment online on the HMRC website.
RESPONSIBILITIES – AS A DIRECTOR OF A LIMITED COMPANY
As a director of a limited company, you have certain responsibilities. You must:
- Try to make the company a success, using your skills, experience and judgement;
- Follow the company’s rules, shown in its articles of association;
- Make decisions for the benefit of the company, not yourself;
- Keep company records (payments, costs, accounts) and report changes to Companies House and HMRC. You need to keep the records for at least 6 years;
- Make sure the company’s accounts are a ‘true and fair view’ of the business’ finances;
- Register with and file returns with Companies House and HMRC (for Corporation Tax, Self-Assessment and PAYE). Pay Corporation Tax on profits, Income Tax and National Insurance on salary. Pay Employers NI on salary. Ensure all information is reported and paid on time;
- Register for PAYE if employing staff. Pay correct minimum wage, make deductions for tax & NI. If you provide expenses or benefits to employees or directors, you may need to tell HMRC and pay tax and NI on them;
- You can hire other people to manage some of these things day-to-day (e.g. an Accountant) but you’re still legally responsible for your company’s records, accounts and performance;
- You may be personally liable for your company’s business liabilities and be fined, prosecuted or disqualified as a company director if you don’t follow the rules;
- Include your full company’s name (including Ltd) on all company documents, publicity and letters. You must also show: the company’s registered number & office address, where the company is registered (England and Wales, Scotland or Northern Ireland). If you want to include directors’ names, you must list all of them.
- Display the word ‘invoice’ on the document and include: a unique identification number, your full company name, address and contact information, the company name and address of the customer you’re invoicing, a clear description of what you’re charging for, the date the goods or service were provided, the date of the invoice, the amount being charged, VAT amount if applicable, the total amount owed.
- VAT invoices must be used if you and your customer are VAT registered. These include more information than non-VAT invoices.
- As a director of a limited company, you can take money from the company in 3 ways:
- Salary, expenses and benefits
- If you want the company to pay you a salary, expenses or benefits, you must register the company as an employer with HMRC.
- The company must take Income Tax and National Insurance contributions from your salary payments and pay these to HMRC, along with employers’ National Insurance contributions.
- If you or your employees make personal use of something that belongs to the business, you must report it as a benefit and pay any tax due.
- A dividend is a payment a company can make to shareholders if it has made enough profit.
- You can’t count dividends as business costs when you work out your Corporation Tax.
- To pay a dividend, you must: hold a directors’ meeting to ‘declare’ the dividend, keep minutes of the meeting, even if you’re the only director
- Dividend paperwork. For each dividend payment the company makes, you must write up a dividend voucher
- Tax on dividends. Your company doesn’t need to pay tax on dividend payments. But shareholders may have to pay Income Tax if they’re over £5,000 – see future blog for more info
- Directors’ loans
- If you take more money out of a company than you’ve put in – and it isn’t salary or dividend – it’s called a ‘directors’ loan.’
- If your company makes directors’ loans, you must keep records of them. There are also some detailed tax rules about how directors’ loans are handled.
- Salary, expenses and benefits
Pinnacle are here to help! If you would like assistance in setting up a Company or you are not sure which structure will be best for you, we will take the time to understand your business before helping you to identify the best setup for you.
We can also help collate and report your annual returns of information to HMRC and Companies House. Remember fines and penalties are imposed for late returns, late payments and mis-information provided.
Remember you need to set up your structure before you start trading. Everyone who makes an income needs to make a return to HMRC even if you have no overall taxes to pay.
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