So you want to start a limited company?
Are you really sure? Do you know why you want to have a limited company? Do you know the tax implications of a limited company? Are you a highly organised person and slightly schizophrenic to be able to split yourself from the company financially and operationally?
Yes, there MAY be tax advantages to being a company depending on the income/profit level of the company, but there are thresholds of effectiveness and subsequent budgets may change it. If being a company is marginal for tax purposes at the moment, then it is not a good enough reason. Limited liability may come into play; a divorce on the cards and want to limit access to funds; or just for the kudos of being a company. Some bigger companies only want to trade with other companies as the perception of being a company is better than being a sole trader. BUT, you have to be ready for it or have people around you that can deal with all the accounting and admin headaches.
After all , you may have set up a company in say July 2013, filed dormant accounts in August 2014, carrying on in business through 2015 & 2016 thinking you are operating as a company not realising that as you had not filed your annual return, your company had been struck way back in February 2015. What a nightmare to try and unpick. All because you didn’t know what had to be done when and thinking that filing your annual accounts was the same as filing your annual return. Of course, you get the other way round where people file their annual return but don’t bother filing their annual accounts & tax return as they are dormant or took advice from the man in the pub, and then the fines start racking up meaning the 8 months of fines was more than the turnover for the year.
Factors that need to be considered for deciding whether to be a company or not:
- Level of control that you want to have over the business;
- Size and scope of the business you want to have;
- Tax implications of the chosen structure;
- Expected profit or loss of the business;
- Size & scope of the business plans;
- The likelihood of being sued for any reason;
- The need for cash from the business;
- Who will need to be involved with the business;
- Legal requirements for the type of business;
- Ability to deal with financial administration.
But before we go into the things you need to know about running a company from the finance & admin side, have a think about whether this is a new venture to you. Often, the first year or two of a business makes a loss or very little profit. If this is the case, and you don’t need to be a limited company, then you may be able to utilise any losses against other personal income in the year incurred, or small profits used against your personal allowance. Losses in a new company can only be used in the company going forward and therefore locked into the company. Once the business becomes profitable and to a level it is tax efficient to be a company, then create the company and transfer the business.
Here you go: The things you need to know but may not be told:
Director’s responsibilities – may be subject to criminal law.
I thought I would start with the scary one. Being a director has responsibilities that are written into Company Law, and therefore if you don’t do things properly or on time, you may be committing a criminal offence. It’s always considered that company law is a bit weak and nobody takes it too seriously, but if you submit your accounts and other paperwork in late, then it is a criminal offence. The worrying thing is that if you fail to keep proper accounting / business records, it’s also a criminal offence.
The company money is not yours.
You may be the only director and the only shareholder, but the company and you are two separate legal entities, so although you are earning money for the company, that money belongs to the company. You cannot just dip your hand into the company bank account if you run short of money personally. It’s theft. Any money from the company to your bank to your personal account (or being used for personal affairs) must be backed up by the proper paperwork – payroll, expenses, dividends. Anything else is a loan from the company which has to repaid in full otherwise there are tax consequences for your personally and the company. So – in other words – don’t do it.
Is it really limited liability?
That is one of the big attractions of being a limited company in that it is the company that is liable and not the directors & shareholders. But – think again. There are occasions where creditors can get to you especially if it is considered that the company is wrongly trading. A bank will often ask for a personal guarantee if they lend to the company.
Hidden accounting costs.
You are likely to pay more for your accountant because there is a lot more to do with regards to the accounts & tax returns, along with director loans, dividend issues, changes in company laws & accounting regulations that have to be applied. Although the accountant won’t be liable for unknown errors, they will do their best to advise you of things that they become aware of. If you don’t use an accountant as a sole trader, you may want to consider one as a company. With the online filing ability with Companies House and HMRC, you can do all the filings required without the need for an accountant.
Proper accounting records.
We’ve already stated that it is a criminal offence for not keeping proper accounting records. So if you have the idea of just shoving the receipts into a drawer or shoebox, then think again. A company needs to keep more detailed records so you really need some form of accounting system, and if the digital reporting comes about – good luck if you don’t have something.
The number of people that I talk to have set up their company, running their company with invoices etc, but running the bank through a personal bank account. No No No No NO. You and the company are two different legal entities. The earmarked company money is not yours. This makes it a loan from the company to you – what a nightmare. Bite the bullet – make an appointment with the business bank manager, take your incorporation certificate and other ID to that meeting and set up a company bank account. You may be lucky and get a year’s charge free banking, but the bank fees are an allowable expense for the company, so sorry – suck it up.
Expenses of the company
Gone are the “round sum” expenses you would put through as a self-employed person, it’s time to get real with proper expenses with back up. And you can forget about the working from home allowance you used to get as a sole trader – different rules apply for a company and its employees. If you are operating the company correctly, you as a director should be on the payroll.
Some costs incurred would be allowable to bring into the company when it first starts to trade, but they have to be proven to be for the company, and if bringing in items that had use before, they can only be brought in at a reduced value for example a computer purchased 6 months before the company was formed, but is going to be used in the company, needs to have its value reduced to recognised its use before being a company asset. Expenses incurred wholly and exclusively in the course of setting up the business for which the company was later formed can be reclaimed. Typical pre-formation expenses include: internet and domain name fees, computer equipment and software, accountancy and other professional fees, and travel costs. Other costs MAY be allowable and it is assumed they were incurred on the first day of trade. The actual fee for creating the company is not allowable against corporation tax, although is a cost of the business. Sorry.
Number of Shares
It is up to you how many shares you have and the value of the shares. You could 1 share valued at £1, or 100 shares valued at £0.01 or valued at £1, £10 etc etc. But think about growth. If you want to bring on investors, if you only have 1 share, then you need to jump through a few companies house hoops to issue more shares etc. if you build flexibility at the beginning, then you can do transfers. Be careful of your decimal point. One client set up his company with one share with a value of £0.001. It got sorted out, but gave the wrong impression to the outside word.
Now you are aware of a few issues with being a company and still feel is it right for you and your business, then you can set up the company directly with companies house for a cost of £15 adopting standard terms and conditions on line, £40 if you do it on paper, and anything thing from £50 to £350 if you use a formation company or accountants to do it for you. It depends on the services you require. If you need help, feel free to book a consultation with us.
The information contained in this document is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.