Updated on: Oct 8, 2023
When a limited company contractor signs up for our accounting service and are new to contracting, they often have limited knowledge about how a company works, how to get things set up, and what is involved on a month-to-month basis. Of course, once they’ve been up and running for several months all of this becomes a lot clearer.
So today in this blog article you will get a good overview of how to run a limited company works. We have written it for those who are brand new to contracting or are looking to get started in the next few months. We have a separate blog post about how different contracting businesses are taxed.
Running a limited company can offer numerous advantages, such as protecting your personal assets and providing a more professional image for your business. For a lot of our clients it also makes sense from a tax perspective. In this guide we will walk you through everything you need to know about setting up, running, and even closing your UK limited company. From understanding the different types of limited companies to ensuring legal compliance, this guide will equip you with the knowledge you need to successfully navigate your way through getting started.
- Understanding limited companies and their legal/financial implications is extremely useful for selecting the most advantageous structure.
- Setting up a limited company involves registering with Companies House, opening a business bank account, appointing directors/shareholders, and understanding taxation.
- Running a limited company requires director responsibilities, shareholder involvement & financial management to ensure compliance while also running tax efficiently.
Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.
Understanding Limited Companies
A limited company is a separate legal entity from its directors, employees, and shareholders, which means that it is responsible for its own debts and obligations. This structure, similar to a limited liability partnership, helps protect the personal assets of directors and shareholders, as they are not personally liable for the company’s debts.
The benefits of establishing a limited company include limited liability, increased credibility, and taxation optimization. However, getting to grips with the distinction between a limited company and a sole trader, as well as the variety of limited companies available, is needed in choosing the most suitable structure for your business.
Types of Limited Companies
There are several types of limited companies, including private companies limited by shares, public limited companies, and companies limited by guarantees. A company limited by shares is a type of limited company where the responsibility of the owners is restricted to the nominal value of the shares issued by the company. This structure is common for most small businesses and startups, as it allows for easier raising of capital and a clear division of ownership among shareholders. Our clients do not consider any other structure, a private company limited by shares is the “go to” option.
On the other hand, a public limited company can offer its shares to the general public and list them on a stock exchange. This type of company is typically reserved for larger businesses with greater financial resources.
Lastly, a company limited by guarantee does not have shares or shareholders; instead, it has guarantors who guarantee to pay a fixed amount towards the company’s debts. This structure is often used by non-profit organizations and resident management companies.
Setting Up a Limited Company
The company formation process of setting up a limited company involves several steps including choosing a company name, appointing directors and shareholders, and registering with Companies House. Verifying that your selected company name is not the same as, or “too like” a company already registered, and doesn’t suggest any false implications or come across as offensive, is paramount.
Once your company is registered, you will need to register for taxes, such as corporation tax, PAYE, and VAT, and open a free business bank account.
To set up a limited company, you need to prepare and submit several company documents, including the memorandum and articles of association. These documents define your company’s purpose along with its internal rules, forming an integral part of operating your company within the legal boundaries.
It is also worth noting that a limited company must have at least one human director (they must be an actual person, not a corporate director which is simply another firm acting as director) and may or may not appoint a company secretary, who is responsible for ensuring the company adheres to the applicable regulations and that other company administrative duties are attended to.
For our clients who are looking to register a normal trading company for their contracting activities, the memorandum and articles of association are extremely straightforward. In this case they simply choose the template version offered by Companies House.
Registering for Taxes
Registering your limited company for taxes is an important step in setting up your business. You will need to register for corporation tax within three months of becoming active (ie when you start trading through it). The HMRC will actually automatically register your business for corporation tax, however the important part that you need to do is inform them once the business becomes active.
In addition to corporation tax, you may also need to register for Value Added Tax (VAT) if your company’s taxable turnover exceeds the VAT threshold. Failing to register for taxes in a timely manner could result in fines and penalties, so it is essential to stay on top of your tax obligations.
Also if you intend to pay yourself a salary through your business (which is normal for all of our contractor clients) then your business needs to be registered for PAYE. We can look after this part also.
Finally, I would like to touch on the absolute importance of sitting up an online Business Tax Account with the HMRC. This is an online account where you can view all of your business tax registration information, payment due dates, filing history etc. Basically anything to do with your business and HMRC taxes are handled through your business tax account. Importantly, you can also very easily assign us to be your tax agent so we can handle all queries and correspondence from HMRC.
Running Your Limited Company
Once your limited company is set up, you will need to manage several aspects of its operations, such as director responsibilities, shareholder involvement, and ensuring legal compliance.
As a company director, you are responsible for managing the company’s operations, making decisions, and ensuring legal compliance. Shareholders, on the other hand, own shares in the company and have voting rights at shareholder meetings, influencing company decisions.
If we were appointed your accountant we would handle all of these aspects for you to ensure you know what is happening and what you need to do. The important point here though is you cannot offload responsibility for running your business compliantly, to your accountant. The buck always stops with the company director(s).
As a director of a limited company, you have several legal obligations to fulfill that are related to the day-to-day management of the company including managing finances, ensuring tax compliance, maintaining company records and fulfilling reporting requirements to Companies House. It is important to note that, while you may appoint an accountant and/or company secretary to execute your legal obligations, you remain ultimately responsible for ensuring the accuracy of the work.
This means that you should always stay informed about your company’s financial health and ensure that all necessary filings and reporting requirements are met.
Shareholders play an important role in the operation of a limited company, as they possess shares in the company and have voting rights at shareholder meetings. One way of thinking about this is that the directors run the company while the shareholders own the company. In the case of most of our clients the director and the shareholder are the same person.
By attending shareholder meetings and exercising their right to vote on matters such as the appointment of directors, approval of financial statements, and distribution of dividends, shareholders can influence company decisions and help shape the direction of the business.
As you can imagine for most of our clients these shareholder meetings are just a formality especially where the shareholder appoints themselves as director, or approves themselves as director to accept and file the financial statements for the company.
The success of any limited company is tied to effective financial management. This includes:
- Understanding taxation
- Paying yourself
- Managing company finances to ensure that your company remains financially healthy and compliant with all relevant laws and regulations.
Proper financial management can help you maximize your company’s profits, minimize tax liabilities, and ensure that your company continues to grow and thrive.
Limited companies are subject to various taxes, such as corporation tax and Value Added Tax (VAT). The current rate of corporation tax is between 19% and 25%. The rate of tax depends on your company profitability along with the number of associated companies you have.
Additionally, your company may be liable for other taxes, such as National Insurance Contributions (NICs) and PAYE, depending on the nature of your business and levels of salary that get paid. Staying abreast of your company’s tax obligations and ensuring prompt filing and payment of all taxes is paramount and is an area where we are extremely effective in advising.
As a director and shareholder of a limited company, you can pay yourself through a combination of salary and dividends, optimizing tax efficiency. By implementing a strategy of a low salary supplemented by dividends, you can reduce both National Insurance Contributions and the amount of income tax payable.
This approach allows you to maximize your take-home pay while minimizing your tax liabilities, allowing you to reinvest more money into your business or save for the future. It’s a very common strategy that is adopted by most limited company contractors.
Record Keeping and Reporting
Limited companies must adhere to proper record keeping and reporting practices to meet legal requirements and provide precise information to stakeholders, ensuring significant control over their operations.
Maintaining statutory registers and filing annual accounts and tax returns are important aspects of record keeping and reporting that every limited company must adhere to.
Statutory registers contain information about the company’s directors, shareholders, and other key details. Keeping these registers current is key as shareholders and other parties can request to inspect them.
By maintaining accurate and up-to-date statutory registers, you can ensure that your company operates in accordance with the law and that all relevant information is accessible to interested parties.
Annual Accounts and Tax Returns
Submitting annual accounts and tax returns to HMRC and Companies House is a critical element in the operation of a limited company. The annual accounts provide a snapshot of your company’s financial health, while the tax returns detail your company’s taxable income and tax liabilities for the year.
By ensuring timely and accurate filing of these documents, you can help your company maintain a strong financial position and avoid potential fines and penalties for non-compliance.
Fortunately for all of our clients they get to use our free cloud-based accounting software which ensures their record keeping is accurate and auditable.
Closing or Selling Your Limited Company
There may be instances when you consider closing or selling your limited company. During such times, understanding the differences between dissolution and liquidation, along with the steps involved in each process, is really important.
For our accounting clients, when the time comes to finish trading, the company is closed down. It’s very rare for a contractor to sell their limited company, and in fact since we started our accounting firm in 2005 I don’t believe we’ve had an instance where a contractor has sold their company.
Dissolution is the process of formally closing a company and removing it from the Companies House.
Dissolution vs. Liquidation
Dissolution is the process of closing a company that has not actively traded, while liquidation involves selling the company’s assets to pay off debts before closing. Dissolution involves filing the necessary paperwork with Companies House, notifying creditors (usually just the HMRC who automatically keep themselves informed of what companies are closing down), and discharging any outstanding debts.
Liquidation, on the other hand, involves the sale of the company’s assets and the use of the proceeds to settle any outstanding debts, after which the company is dissolved. Understanding the differences between these two processes is essential for choosing the appropriate course of action when closing or selling your limited company.
While a liquidation is usually (and rightly so) associated with business failure, there is a specific type of liquidation called a Members Voluntary Liquidation that a number of our clients do use. This is a form of solvent liquidation where the company can (and does) pay all its outstanding debts, and then has a remaining sum left to distribute to the company shareholders. The reason it’s popular with a number of our clients is because it is a tax efficient way of extracting a significant sum of money from your business when you close it down (where that business has a high level of retained earnings).
In conclusion, running a limited company in the UK offers several advantages, such as limited liability, increased credibility, and taxation optimization. By understanding the different types of limited companies, setting up and managing your company effectively, and ensuring legal compliance, you can successfully navigate the world of limited companies and build a thriving contracting business.
Whether you are just starting out or have been running a limited company for years, staying informed about the latest regulations, tax laws, and best practices is essential to maintaining a strong financial position and a positive reputation in the business community. By following the guidance provided in this comprehensive guide, you can ensure that your limited company remains compliant, profitable, and poised for on-going success.
Frequently Asked Questions
How do I pay myself as a limited company?
To pay yourself as a limited company director/shareholder, it is more tax efficient to keep your salary lower and pay yourself dividends.
Note that dividends can only be paid out if the company has made a profit; in such cases where losses have been made, the only way to take money from the business is via salary.
Can you run a ltd company on your own?
Yes, you can run a limited company on your own as both the sole director and shareholder.
How much tax do I pay if I own a limited company?
This is a really loaded question, and it depends on a really large number of factors. The reason it’s a bit tricky is because you can pay yourself a mixture of salary and dividends through your business, and also make tax free payments to your personal pension. Both salary and pension contributions will reduce your corporation tax liability, while dividends are paid from company profits that have already been taxed. Dividends themselves become taxable on your personal tax return.
Also if you close your business down with a significant sum of retained earnings you may be able to extract those with only paying 10% tax.
Is it still worth having a limited company?
The advantages of trading as a limited company, such as personal financial security and tax/NI benefits, make it worth considering for any business. You also have greater tax planning opportunities. Generally speaking, if you are a freelancer you will pay less tax by working through a limited company than you will as a sole trader.