Starting a limited company can be a very good idea if you want to start your own business and become an entrepreneur. It gives you the freedom to expand your business and take it to new heights. However, setting up a limited company has its own procedures. There are certain laws that need to be adhered to during the setup of a company. So, today we will discuss the entire procedure and steps required to set up and start a limited company.
Company Name & Address
This is the first step of the company formation. You need to choose a proper name for your company. If you are setting up a company in the UK you need to remember a vital thing. The name of your company must end with the words “Limited” or “Ltd.” Moreover, the name of your company cannot be identical to any existing name in the Companies House names index. Also, it must not suggest any connection with any government or local authorities. You must register your trademark separately. You also need to have a registered company’s address and this will be the address where all the communication from the Companies House and HM Revenue & Customs will be made. The address of the company must be a physical address in the UK.
Registration & Legal Paperwork
Now, this is the next step in the process of formation of a limited company. You need to get your company registered with the Companies House and it requires certain legal and paperwork which are as follows:
- Articles of Association: It consists of all the terms and conditions required to run your company.
- Certificate of Incorporation: It is an official confirmation that your company is successfully formed.
- Combined Register: It consists of a list of all the directors and the people involved in running the company. It will also contain any interest in other companies a director may have such as shares in other companies.
- Memorandum of Association: It is a kind of mission statement which includes what your company must undertake and how it must do it.
- Share Certificate: This certificate demonstrates the value or worth of the shares of the company and how they are allocated.
Choosing Directors of the Company
Whenever a limited company is created by law it is considered as a separate legal entity. It has perpetual succession and a common seal. It is considered separate from you with its own accountability and responsibility. Thus, after the creation of the company you need to appoint yourself as the director of the company. You are responsible to manage the company as per the terms and conditions mentioned in the Articles of Association. However, if you want you can also appoint anyone else as additional directors of the company.
Details of Your Shares & Shareholders
During the registration process, a statement of capital is highly important and you will need to declare the following in it:
- The total value and the exact number of shares of your company. This is also known as the share capital of your company.
- Name and address of all the shareholders including subscribers and members.
- As a director of the company, you are also eligible to hold shares yourself.
Providing all the above detail is extremely important because dividend will be based on the profits earned by the company at it will be shared among all the shareholders based on the number of shares they hold.
It is not compulsory for all limited companies to have a company secretary. However for larger companies company secretaries are responsible for maintaining statutory registers, keeping a track of the minutes of the board meetings, and looking after the statutory filings. Company secretaries are generally barristers, solicitors, or professionally qualified accountants.
Company Bank Account
Every limited company should have a company bank account irrespective of you are the sole person operating the company or not. A company is a separate legal entity and is completely separate from its owner. It has its own obligations or liability. It is also very important the company bank account is maintained in a proper and transparent manner without any omissions or mistakes so that it can be showed during an audit if required.
Unlike any individual or sole trader, a limited company does not pay income tax. A limited company is liable to pay corporation tax on its profits and you have to register your new company to pay corporation tax. For the first year, the initial tax return is to be filed within a period of 12 months from the beginning of the company. Each year the company is liable to file its corporation tax return (CT600). For smaller companies with profits up to £300,000, the corporation tax rate is 19%. For larger companies with profits up to £1.5m or more, the tax rate is also similar at 19%. But it is extremely important that you calculate your corporation tax correctly and file it each year within the specified time frame to avoid any legal complexities.
Value Added Tax (VAT)
If your company has a turnover of £85,000 or more during any 12 months of operation you need to register your company for value-added tax (VAT). You need to collect VAT on the behalf of HMRC and add the prevailing rate to your invoice. The standard rate is 20%. After you deduct any VAT spend by your company, you have to pay the remaining balance to HMRC. There are several types of VAT schemes available. Some of the most popular are ‘cash scheme’ which lets you pay the VAT after you receive the payment. If you go for the ‘Flat Rate VAT scheme’ it provides you with an option to calculate your VAT at a flat rate. Thus it enables you to avoid any complexities involved in the calculation of VAT and you can pay it without any difficulty. The entire process becomes much easier in this method and thus it is the most preferred option among the companies.
Personal Income Tax
In addition to the tax payable by the company, you are liable to pay personal income tax on any income that you receive from the company in the form of dividend or salary. You are liable to complete a self-assessment by 31st January following the tax year if you are planning to pay your tax online. In case of posting your self-assessment, it must be done within 31st October. You will have to register with HMRC in order to pay your personal income tax. You must notify them regarding this. The concept here is that as you are separate from your company and your company has a separate legal entity, you are liable to pay personal income tax on any amount that you might receive from the company.
Employers Liability Insurance
If you are employing people in your limited company then you are legally bided to take an employer’s liability cover. It will protect you against any compensation claim due to the illness of the employee or injury while working for you. This is a compulsory legal requirement. You are bound by law to take this insurance if you employ one or more employees in your organization. Failure to do so might attract a fine of £2,500 for each day you’re not covered.
Although public liability insurance is not mandatory it is a fundamental type of business insurance. It becomes extremely important when you have visitors to your premises or work out onsite for your clients. It will cover you against any compensation claims or legal expenses if any suppliers, clients or any other public member suffer from personal injury or death or damage to their property because of your organization.
Professional indemnity insurance is very important. It protects your business against any claim that might arise due to any particular work of yours. Or any financial loss to any customer caused by your work of negligence or advice. The customer thinks you are responsible for it. If you want you can also opt for other insurance like tax investigation insurance. It will cover you against any cost that might incur due to a potential investigation by HMRC into your company.
Invoice forms a vital part of daily company operations. You need to generate invoices and send it across your clients in order to receive payments from them. However, there are certain guidelines which you need to follow while preparing invoices for your company which are as follows:
- The word ‘invoice’ must be included and written on the top.
- It must have the invoice number and if you are VAT registered then it must contain a sequential number which must begin with the following number which ended in the last invoice.
- Client’s name and address.
- The time of supply from a tax point of view if different from the date of invoice.
- A detailed description of goods or services being rendered.
- An item wise breakup showing the unit price before and after VAT, VAT rate. Total amount payable and the total VAT charged.
- You can also include the terms and conditions of payment so that the client remains aware of everything including the payment procedure.
Every limited company can claim a certain portion of their expenses. There are specified guidelines or parameters laid down by HMRC which needs to be followed while doing so. They are as follows:
- Any cost which you incur exclusively for the day to day running of your business can be claimed by you.
- You cannot claim any expense which you have incurred both for dual purposes like business and personal use.
- You can pay your expenses either through the company’s bank account or you can pay the business expenses all by yourself and get them reimbursed from your company.
- Most of the expenses can be offset against your company’s corporation tax liability. However certain expenses like business entertainment cannot be included in it.
- Accurate and transparent records of pre-formation and running costs like VAT receipts should be maintained. You must show them as proofs and justify your actions if you are ever enquired about it.
Although it is not possible to give a complete list of expenses that can be claimed. But some of the most common expenses that can be claimed are health check, advertising, marketing, PR, childcare, accommodation, bank charges, phone bills, work from home, books, journals, magazines, travel, annual staff party, professional development, business insurance, and start-up cost.
Salary & Dividends
As your company is a separate legal entity, any profits made by the company belong to it. If you wish to withdraw an income from it you can withdraw it as a dividend if you are the owner. You can also withdraw it as a salary if you are the employee. Therefore, as you are both the owner (shareholder) and employee (director) of the company you can strategically divide your income as dividend and salary. This way, you can have the most tax-efficient way of receiving the total income. In regards to paying salary to your employees, one thing must be noted that the national minimum wage rate is not applicable to limited companies that do not have a contract with their employees. As far as dividends are concerned they are not counted while calculating National Insurance Taxes. However, they are subjected to Corporation Tax. Moreover, dividends are taxed at lower rates until and unless the income exceeds the higher rate tax threshold.
National Insurance / PAYE
You need to set up a Pay as You Earn scheme with the HMRC if you want to pay salary to your employees or even if the director is the sole employee of the company. You also need to deduct any National Insurance Liabilities and failure to do so might attract penalties. PAYE is a compulsory system of tax collection and it is deducted from the salaries of the employees. It is applicable to any such person who is earning an annual salary which is more than the Employee National Insurance Threshold. The working of the PAYE scheme is mentioned below.
- First, you have to register your company as an employer with HMRC and once all the information are ready for submission it can be done either online or via phone. You will also receive a unique employer PAYE reference number after submission of your application.
- Your accountant or you will have to set up the payroll of the company. You can either use any software packages available commonly for this purpose or use any online accounting tools of your choice. P45 of each of the employees will be needed in order to do an accurate calculation of income tax and NIC deductions with the help of appropriate tax code. P46 can be used for a short term in case of employees who do not have P45.
- Each month you or your accounts department will issue a payslip to every employee detailing the gross and net pay. It will also include the deductions for NIC and income tax.
- All taxes should be deducted at source and must be paid to the HMRC by 19th of every month. If your amounts are small you need to pay it at each quarter. In case of electronic payment, you need to pay them within 22nd of each month or quarter as the case may be.
- If your salary is less than the current income tax or NIC thresholds, you still need to inform HMRC online that you owe ‘nil’ tax.
- Any new employee must be added to the payroll and a P60 must be provided at the end of every tax year which shows the summary of tax deducted and salary paid. Moreover, you also need to prepare a P11d form if any employee receives any taxable benefit for the year.
- A P45 must be issued to any employee leaving the company. The employee must have a hassle-free transfer to the next employer.
IR35 & Its Importance
Introduced in the year 1999 IR35 is a tax law that came into force in April 2000. It was implemented in order to counter the problem of disguised employment. It is also known as Intermediaries Legislation and was introduced as a part of the Finance Act. In case of disguised employment, organizations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract and so they become disguised employees. This is done so that the engaging organization can save a good amount of cash. They neither have to pay employers’ NICs nor they have to offer any employment rights or benefits. IR35 is designed keeping in mind the genuine role it has to play in defending both the rights of the workers or employees from unscrupulous employers and the Exchequer from lost tax yield. However, it is to be observed whether IR35 has become fully successful in achieving its desired results or not. IR35 is also focused to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.