1. What is a Limited Company?
A limited company is a business that’s incorporated at Companies House. It is either limited by shares or limited by guarantee. Once a business is incorporated, the limited company becomes its own legal entity. As it's separate to the people who run or own it, the business can enter into contracts in its own right.
Limited companies account for the majority of UK businesses today. The money they make from sales belongs to the company, rather than the individuals who run or own them. Furthermore, a limited company’s directors and shareholders cannot withdraw capital from the business whenever they like. Instead, they get paid by the company in the form of salaries and shareholders’ dividends.
2. How do Limited Companies work?
Here’s an example of what a limited company is and how it works in practice:
1. Marcus runs a marketing agency. He provides services for multiple clients and his small business is growing well. Marcus’s personal accountant advised him to set up a limited company. He decided on a company name and address, and got the necessary documentation in order before incorporating his new business at Companies House.
2. Once his small business was registered, Marcus became the sole director and shareholder of his very own limited company. Whenever the company makes money from investments or the sale of products and services, the money belongs to the company.
3. Whilst the business continues to build up clients and capital, Marcus pays himself with a combination of salary and dividends. The company also reimburses him for any business costs he pays for out of his own pocket.
3. Should I set up a Limited Company?
The decision to incorporate your business is a big call to make. It’s something you should discuss with an accountant first. Typically, an accountant will consider various factors, including turnover, profit and the sector your small business operates in.
There are plenty of associated benefits to setting up a limited company. These include:
• Pensions and Funding. As your limited company is a distinct legal entity, it can be a little easier to secure funding. Plus, as a ‘company employee’ - rather than a sole trader, your pension can be a tax-deductible expense.
• Financial Protection. Setting up a limited company can give you more financial protection. It creates greater distinction between your business and personal affairs. Separating your accounts, records, and business/personal finances, can limit liability and help with things like tax returns. Moreover, if your company gets sued, or falls into financial trouble, being a limited company will help secure your personal assets and credit rating.
• Succession Planning. As a shareholder, it’s much more straightforward to transfer the ownership of a business. For instance, if you decide to sell your business, take early retirement, or in the event of your passing, succession is easier than it is for non-registered businesses in the same situation.
It’s still worth bearing in mind, though, that as a director you won’t receive certain statutory payments. This includes things like sick pay, holiday pay, and maternity or paternity pay.
4. What happens when I incorporate my business?
When you incorporate a business, you become a director and shareholder of your very own limited company. This gives you the freedom, autonomy and jurisdiction to make key decisions, such as the distribution of profits.
Limited company owners receive ‘limited liability’ protection. In practice, this means they’re only responsible for their business’s debts up to the value of their investments. Or, the amount they’ve guaranteed to the company.
However, directors are subject to greater responsibility and scrutiny over their actions. Furthermore, there are certain legal requirements that you must adhere to. For instance, you’ll be subject to higher levels of regulation and administration. So, if, as a director, you have a personal interest - financial or otherwise - in a proposed transaction with the company, you must declare it.
As a director, you’re also obliged to exercise independent judgement, to avoid conflicts of interest, and to act within your company’s ‘articles of association’. To find out more about the directorial responsibilities of running a limited company, click here.
5. Limited Company take-home pay
If you’re a ‘higher earner’, trading through your own limited company could be a good option for you. As the director and/or shareholder, you’ll pay yourself through a combination of salary and dividends. This, in turn, tends to minimise the amounts you pay in Income Tax and National Insurance contributions (NICs).
6. Do I pay tax on shareholders’ dividends?
A dividend is a slice of a company’s profit that goes to its shareholders. The amount of tax you pay on them depends on how much income you receive from shareholders’ dividends each year.
• The first £2,000 of shareholders’ dividends per annum is tax-free.
• Dividends above this threshold, which fall within the basic rate tax bracket, get taxed at 7.5%.
• If they fall into the higher rate tax bracket, they’ll get taxed at 32.5%.
You do not have to pay NICs on any shareholders’ dividends you receive from your limited company.
7. How do I set up a Limited Company?
To set up as a limited company, you will need:
1. Company name and a company address.
2. At least one director and one shareholder. The same person can be the owner and director of a limited company.
3. Standard Industrial Classification (SIC) Code. This is a code, which specifies the nature of your business.
You’ll also need three pieces of personal information about yourself, as well as the shareholders and guarantors of your limited company. This can include your:
• Place of birth
• Telephone number
• National insurance number
• Passport number
• Mother’s maiden name
• Father’s first name
You can register:
It costs only £12 to register your limited company online with Companies House. The fee is payable by debit card, credit card or via PayPal. Upon completion, you’ll receive a ‘certificate of incorporation’. This shows the company number, its formation date, and confirms its legal existence.
If you use the online service, registration for Corporation Tax is automatic. Alternatively, if you apply by post, you’ll need to register for Corporation Tax within the first three months of business. For a full list of registration and incorporation fees at Companies House, click here.
8. Limited Companies & Danbro Business
When you set up a limited company, your focus needs to be on growing your small business, rather than any administrative or payroll problems. So, you need a specialist accountant who’s attuned to your needs. Your small business accountant should plan ahead, keep a watchful eye on your limited company’s cash flow, and help you make informed decisions based on relevant, real-time data.
At Danbro Business, we’re small business specialists. Our dedicated team will take care of your business’s registration, incorporating your company within 24 hours. We have an exclusive range of affordable service plans for small business accountancy. All you have to do is decide which plan suits you and your limited company best.
Our set up costs are £95 (+ VAT). This includes the cost of incorporating your business, as well as VAT registration and assessment, as standard. We’ll make sure you’re registered for Corporation Tax and PAYE too. What’s more, if you wish to upgrade, we also have two other packages, offering significant savings on your combined accountancy and incorporation fees.
From straightforward tax returns to the outsourcing of entire finance departments, we can take care of everything to give you more time to focus on growing your business. So, get in touch today and launch your business with Danbro Business.
Neil Ormesher FCCA CTA
Neil Ormesher is the Managing Director of Danbro Business and Danbro Accounting Ltd.
With more than a quarter of a century in the industry, Neil has helped thousands of businesses and contractors achieve their goals, grow their businesses, and improve their bottom line. Having first joined Danbro back in 2008, Neil joined the Board of Directors to oversee the Company’s operations, before eventually taking charge of the entire Accounting department.
Neil is an expert in taxation and is passionate about efficiency, innovation, and harnessing the power of technology to deliver the highest standards of service. He’s also a (long-suffering) supporter of Everton FC and lives in Lancashire with his wife and three children.