If you’re a small business or a contractor exploring the best way to manage your finances, it’s very natural that you’d consider setting up a limited company.
From some conversations we’ve had lately, there seems to be a belief that this is a complex, difficult procedure. It might just be that we’ve been doing this for as long as we have, but we believe it shouldn’t be seen as such a challenge.
In today’s blog we’re taking a look at how you set up a limited company – and some ways that you can make the most of it.
What Do You Need When Setting Up a Private Limited Company?
A limited company is legally a separate entity from the people who own and work there. When you keep this in mind, it makes sense that a lot of the things you need are all about building an identity.
The most important things you should have to hand when starting the process are:
- A company name
- Your company’s address
- At least one director
- At least one shareholder
- Details of the company’s share breakdown
- All details of anyone with significant control over your company
- A memorandum and articles of association
- Your SIC Code
Some of these are a little more complicated than others:
What Counts as Significant Control over a Private Limited Company?
For the purposes of setting up a private limited company, you are considered to have significant control if you own more than 25% of shares or have voting rights.
What is an SIC Code?
An SIC code, also known as a Standard Industrial Classification code, identifies the area the business is active in. You can find the official list on Companies House here.
What Are the Memorandum and Articles of Association?
At their most basic, these documents are an agreement by shareholders to create the company and the written rules under which it will operate. The government has a pro-forma for the memorandum of association here and model articles of association here.
Your company’s name cannot be the same as another registered company’s. We recommend using the Companies House register to find out if the name you want has been taken. If you incorporate with a similar name to a previously existing company and they complain, you will have to change your name.
Your name should end in either Limited or Ltd or, if you register the company in Wales, in ‘Cyfyngedig or ‘Cyf’, which are the Welsh equivalents.
Your company address must be a physical address with a postcode, and it must be in the same country as you are registering the company. The home address of a director or of the person managing your Corporation Tax can be used if there is no distinct business premises.
Your director must be at least 16 years old. It’s possible, though rare, to be disqualified from being a company director, and obviously anyone who has cannot be your director. In the case of contractors, there will usually be one director and one shareholder, making this very straightforward.
Registering a Private Limited Company
After you have everything assembled, you can register your company online in 24 hours for just £50, payable by debit card, credit card, or PayPal. You can also register by post; this takes eight to ten days and costs £71. An ID and right to work check must be conducted, per the Companies House rules. Once registration is complete you will receive a certificate of incorporation. This confirms your company exists legally and will have your company number and date or formation.
You will need to register for Corporation Tax within three months of starting your company.
You can also register through an accountancy practice like ICS Accounting. Forming a company through ICS Accounting is completely free of charge, provided that you sign up to use our services. With your permission, we can also assist you in registering for Taxes, such as Corporation Tax. We also provide strong peace of mind as you can be sure your company has been set up properly, and shareholding will be correct from the outset.
Benefits of Being a Limited Company as a Contractor or SME
When the directors and shareholders of a limited company are the same people, there are a number of ways they can benefit from this status. This is done through a mix of salary, dividends (if profitable), and benefits. For contractors using a limited company they will always be in this position, but it’s also true for many startups.
Director’s Salaries
The right mix of salary, benefits and dividends can vary on a taxpayer-to-taxpayer level. You may have seen people attempt to impose a one-size-fits-all model onto limited companies, usually with a low salary and anything else paid as dividends, with a reminder to clients to avoid higher tax brackets where possible.
The argument behind this is that while salaries attract National Insurance once high enough, dividends only suffer income tax once tax-free allowances have been used up.
At the same time, many of the benefits associated with National Insurance continue to accrue if the salary is in excess of the lower earnings limit. This area is known as the ‘golden zone’, with access to state benefits and pension rights retained without paying contributions. Ultimately, the decision lies with the director of the company to determine their remuneration, however ICS Accounting can offer you tailored advice on an individual basis.
Other Impact Factors
In some cases this is an appropriate arrangement, but not in all. For one thing, consider the tax bill. Salaries are deducted from profits when determining the company tax bill, but dividends are not deductible.
Some financial institutions are also more wary of dividends than salaries, and therefore those looking for mortgages or loans may benefit from higher earnings and lower dividends in order to obtain these agreements.
Having mentioned loans, let’s also look briefly at loans to the company as a source of withdrawing funds. It’s fairly common for start-ups and small businesses to put cash or assets into companies, and these amounts can be repaid over time. Repayments on these loans will stay off tax returns, unlike salaries and dividends, which both have tax implications.
Company vehicles, mobile phones, and other Directors’ benefits are also available through limited companies, but there may be tax implications for any of these.
Tailored Solutions
That’s why a tailored solution is called for; an experienced accountant working closely with you can help you assess all of these options and settle on the balance between salary, dividends, and benefits that is most optimal for you.
If you are looking for an experienced accountant, who will provide advice on remuneration levels, we have the solution for you.
If you’d like to discuss this, please get in touch and we’ll be happy to help.
