Setting up a Limited Company
Companies Act 1985
If you set up your company as a limited company it will become a legal body in its own right under the Companies Act 1985 (amended 1989). There are two main types of limited company: Small private companies that have “limited” in their name Large public companies that have “plc” in their name
To set up a limited company a management structure needs to be put in place. There needs to be at least one shareholder, at least one director (note: a public company must have at least two directors), and at least one company secretary. The director and the company secretary must be two different people. For more information on the procedure of registering your company, contact Companies House in Cardiff. There will be a registration fee and a fee each year to file your company's annual accounts. Visit their website at: http://www.companieshouse.gov.uk It is also wise to seek advice from a solicitor.
Advantages of being a limited company
Better access to outside finance, e.g. by issuing shares. Being a limited company means that you as an individual have limited liability. This means that you as members of the company, are only liable financially to the value of the shares that you have invested in the company if the company incurs debts. The company on the other hand is deemed a legal body by the Companies act and is viewed as unlimited. If the company fails and incurs debts then the company must pay the debts if funds are available. Even if the company is wound up, the members only have to pay the full value of their shares initially invested and any premium that may be due on them, they cannot be asked to pay anymore even if the company does not have enough funds to cover the debts. As the company has a legal identity of it's own it can continue trading even after the resignation/death of a member - therefore company members can change. If you are expecting large profits from your business, being a limited company may provide more advantageous tax treatment. The Companies Act provides a standard and convenient management structure for you to follow.
Tax for Ltd Companies
Taxation and Limited Companies - Corporation Tax, Income Tax, National Insurance and VAT. Corporation Tax: The government has a different set of tax laws governing companies, this is corporation tax. The profits generated by limited companies are liable for corporation tax, which is set at different rates depending on the financial band your profits fall into.
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Income tax and National Insurance: If you are a director of your company then you will be classed as an employee by the taxation authorities. As an employee you will be required to pay income tax and Class 1 National Insurance on your salary and any bonus under PAYE. (Inland Revenue National Insurance Contribution Office) This means that depending on which tax bracket your profits fall into your income tax may be less that your corporation tax or your corporation tax may be less that your income tax. At the start of each trading year you can determine your salary - it does not need to be fixed and can be reviewed throughout the year. If the profits turn out to be greater than your salary then you can adjust the ratio of profits to salary depending on which tax system is most favourable to your situation for saving on Corporation tax or Income tax. The profits can be turned into an increase in salary, a bonus or paid in dividends to shareholders. Registration for VAT is required if the business's taxable profit exceeds an annual limit of £54,000 within any 12 month period. (See below - VAT) It is advisable to check through your business forecast figures with an accountant to see which system would suit your business. The "Federation of Small Businesses" also offers advice on self-employment or Limited Company: http://www.fsb.org.uk
VAT
To find out more about the rules of assessment and collection of Value Added Tax contact Customs and Excise. To register for a vat request form VAT1, visit: http://www.hmce.gov.uk Or save yourself the hassle and hand it all over to an accountant to enjoy!
Disadvantages of being a limited company
The legal requirements which have to be met before you can operate the business are quite complex and lengthy. The company cannot make contracts, e.g. take an order for goods or services, until it has been incorporated, i.e. the date on the certificate of incorporation of your company (if the registrar of companies passes your application). Annual accounts must be audited by Companies House. This could be costly and time consuming to prepare. The public would also have access to your financial statements.
Other types of company
Unlimited Company: It is possible to register your company with Companies House as unlimited even though this makes members of the company completely liable for any debts (as opposed to the company being liable). This type of company is rare and is only advantageous under certain circumstances. Unlike a partnership, there will be a separate legal body that exists for making contracts and holding property. This will allow changes in company members if there is a resignation or death without dissolving the company.
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There is no need to file accounts with the registrar at Companies House as members are liable for company funds and debts and so there is no need for the public to have access to financial statements. However, there is still the need to prepare and submit the required paperwork to Companies House. The only difference is the clause of liability in the Memorandum of Association is removed thus making it an unlimited company. This means that the risk of unlimited liability is also present for members. If you have shares in the company and it is wound up you must pay for the value of your shares any premiums on them and any company debts not met by the company itself. More information is available from the Companies House website: http://www.companieshouse.gov.uk
Public Companies (plc's)
The Companies Act 1985 defines a public company as: Limited by shares. Its Memorandum of Association states that it is a public company. A minimum of two members are required to form the company, i.e. two directors. There is a required amount of share capital that needs to be invested in the company before it will be issued with its certificate *S117* from Companies House. Trading or borrowing as a plc without certificate *S117* is a criminal offence.
Summary
Taxation and limited liability are the main benefits of setting up as a Limited Company. Generally corporation tax is less for a limited company than income tax for a sole trader or a partnership. As the salary of the director does not have to be fixed until the results of the years trading are known you can choose how to be paid to minimise tax, i.e. a mixture of salary, pension and dividends. The limited company offers you protection as you have limited liability for debts should the business fail.
For more information on setting up a Ltd company look at the FresheFuture website: http://www.freshefuture.co.uk/
Suzanne Creasey, Oct 2002
The Enterprise Centre for the Creative Arts, London College of Communication Tel: +44 (0)20 7514 7985 Email: info@ecca-london.org
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