With the right help and guidance, setting up a limited company can be an easy and straightforward venture. Formation agents can provide much-needed support throughout the process, whether you are a freelancer currently operating as sole trader, a contractor working through an umbrella provider, or starting your own business from scratch.
While there may be more time spent on administration and costs associated with running a business, for most people, starting a limited company is a more tax-efficient and simple method of operation altogether.
In the main, a limited company is a separate legal entity from you personally, and is responsible for it’s own capital and debts. The person responsible for running the company is the director, who is more often than not the founder of the business, while the shareholders own the company. Directors do not have to own shares, but most choose to invest in them at the time of incorporating their business.
When you set up your limited company, the first thing you will need to do is register your company with Companies House. This is the branch of government responsible for the creation and dissolution of UK companies, and they register and retain all the information it is necessary for you to supply as you incorporate your company. Our simple company formation service can take you through this step by step, You will need to provide the following information:
The shareholders own the limited company, while the director is in charge of running it, but it is possible for you to be both director and sole shareholder. If you appoint shareholders, they will have rights regarding how the business is run, so ensure you appoint people responsibly. In some cases (largely depending on the size of the business), a company secretary may be appointed, although this is not always necessary.
Once you have taken these initial steps, there is more to do when it comes to setting up a limited company.
Once you have formed your new limited company, you must legally set up a company-owned business bank account.
You will need to pay all bills and expenses associated with your business from this account, including employee salary and your own salary as director. Your personal finances must be kept separately, and records of all expenditure and profit associated with your company bank account must be kept. You may wish to hire an accountant to handle the finances pertaining to your new company bank account.
One of the primary differences between being self-employed as a sole trader and incorporating a business are the tax liabilities.
When you form your business, you will need to register with HMRC to pay corporation tax, and if you employ staff, you will also need to register for VAT and PAYE (Pay As You Earn). We have guides on both of these if you want to find out more.
Once you have successfully set up a limited company, you will need to look at your marketing plans to ensure your new business venture gains the maximum amount of exposure. To start with, register your domain name along with your company name to reserve this space for your website. We offer a domain registration process and can help introduce you to some hosting partners.
There are two types of private limited companies, Private Limited by Shares (LTD), and Private Limited by Guarantee (LBG).
The most common type of company formation, a Private Company Limited by Shares or “LTD” company, takes the shape of the business model described above. It is owned by shareholders, run by directors, and incorporated to make a profit that can be either reinvested in the company or paid out as dividends to shareholders.
A Private Company Limited by Guarantee (LBG) is normally used by not-for-profit ventures and registered charities. A company limited by guarantee is run by directors, the same as a LTD company, but is owned by guarantors as opposed to shareholders. A guarantor can be either an individual or a corporate body, and will assume liability for the debts should the LBG encounter any financial trouble.
Alternatively, business may want to examine the possibility of a Private Unlimited Company. With a Private Company Limited by Shares, there is a limit on the amount a director or shareholder will have to pay on their shares should their company fail, whereas with a Private Unlimited Company, there is no limit as the name suggests. There is also no obligation to submit annual accounts to Companies House with this model.
Another alternative is a Limited Liability Partnership (LLP), in which there are no directors, shareholders or guarantors. Instead, the company is run by partners (of which there must be a minimum of two but no maximum), and at least two of these partners must assume responsibility for statutory compliance associated with the LLP. For those who do not wish to set up a limited company but would like the indemnity that comes with separating personal and corporate finances, this is a popular solution.
Finally, there is the option for formulating a Public Limited Company (PLC). Similar to a LTD company in that it is limited by shares, this structure differs in that members of the public are also able to purchase shares.
Ultimately, the decision to incorporate your business comes down to your own financial liability.
As a sole trader, you are essentially your business, at least in the eyes of HMRC. As a director of a limited company, the business is a separate entity. As a sole trader then, you are personally responsible for any debts that may accrue, and therefore you run the risk of insolvency if you are unable to pay them. If your limited company fails, you are liable for the shares you own in the company, but this is separate from your own personal financial responsibility. This offers you a form of protection should your business fail, safeguarding you from personal bankruptcy.
There are a number of other advantages to setting up a limited company, and discussing your options with a formation agent can help you decide on the best course of action.
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