Limited Company Business Type / Structure
“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.” – Colin Powell
Setting up a limited company involves more complexity, (although not overly difficult in real terms), but can be a much better option if certain requirements need to be met (both personal and commercial). Incorporation invariably needs more administration and is likely to incur higher costs for the business, both at the outset and on-going, than if you were simply registered as a self employed sole trader.
As previously stated, as a sole trader you are personally responsible for any debts the business holds … should the business fail, your personal assets are at risk and, potentially, this could result in bankruptcy. Setting up a limited company offers protection against this.
On a more positive note, having limited company status can provide you with much greater commercial credibility with both customers and suppliers. In some areas of business, being a limited company can be a requirement of customers or suppliers. It can also be beneficial with regard to dealing with funders or investors.
The tax implications and governance also needs to be considered in regard to being a limited company. The way business owners pay themselves could be more advantageous from a tax perspective if the venture is incorporated.
The finances of private limited companies are entirely separate from those of its owner(s). A limited company is a separate legal entity and is responsible for its own actions.
Private limited companies can have one or more shareholders but shares cannot be sold publicly, (on the stock market), unless it’s a public limited company. This isn’t normally an area of interest to start-up businesses but possibly an aspiration for the future!
A director of a limited company only risks losing money to the value of what they have invested. So, providing they can not be shown to have acted negligently, fraudulently or recklessly in their business activities, this is the extent of their liability.
It does have to be pointed out that should directors have provided personal guarantees (PG’s) against borrowings (i.e. bank loans etc) for the limited company, they will be liable on a personal basis to the level of the debt outstanding and the protection of the limited company is overridden.
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Setting up a limited company
Basically you are required to register or incorporate online or by post at Companies House. Many people undertake this task themselves (if you feel confident enough) as the guidelines and requirements aren’t overly difficult to understand. But you can choose to use an agent, often an accountant or solicitor, for a modest fee. Either way you will need to provide information about the company with regard to activity, directors and registered address, amongst other information, and sign the relevant forms to register.
You can buy existing limited company names which are available (more info on the Companies House website) but most start-ups form new companies. The key documents to set up a company are –
Memorandum of Association – this provides information on the company name, nature of the business activity and registered office. The memorandum has to be signed by the director(s) in front of an independent witness. The registered address will be the point of contact for Companies House and where any correspondence will be sent.
Articles of Association – this document sets out who and how the company will be run and its regulation.
If you are incorporating by post a completed IN01 form is required, (available on the Companies House website).
Companies House do have model templates for memorandum and articles of association on their website for online applications. Should you require bespoke documents there are other online resources where they can be downloaded (usually for a fee), or available through the third party you may use to register the business on your behalf.
Private limited companies must appoint at least one director and a shareholder, (they can be one and the same if needs be), in the limited company. It is very important to understand that this cannot be someone if –
- They have been disqualified from acting as a limited company director
- If they are an un-discharged bankrupt
- They are younger than 16-years-old
Private limited companies no longer have to appoint a company secretary. Directors of private limited companies are responsible for notifying Companies House of any changes in the structure and management of the company and the need to have a company secretary as part of the incorporation process is no longer a regulatory requirement.
Accounts must be filed with Companies House each year ahead of the requested date, otherwise a fine is payable. Unless the company is exempt, accounts must also be audited annually. The company (or its accountants – but ALWAYS remember it is your responsibility and the accountant acts as an agent on your behalf) must inform HMRC by submitting annual return which has details of any taxable income or profits and how that figure has been arrived at. The business is then liable for the Corporation Tax payable against the profits declared.
Company directors are classed as employees of the company and, as other employees, must pay income tax and Class 1 National Insurance contributions. Profit will often be retained for further investment and/or distributed to shareholders as dividends.
Ensure you seek professional advice when setting up a business, this will save you from headaches or worse later.
Limited Company thoughts from Yorkshire Powerhouse
One thing that is always a prime consideration running a business is your obligations to financial compliance and regulation Read >