A Comprehensive Guide On Running A Limited Company
A limited company is a separate legal entity from its owners or shareholders and has separate assets, liabilities, and a legal structure. In the UK, limited companies are set up with Companies House and governed by the Companies Act. Running a limited company requires you to have in-depth knowledge of its responsibilities, paperwork, taxes, insurance charges, and required documentation. In this meaningful article, we will try to provide you with detailed information about how to run a company once you start a company.
Types Of Limited Companies
You might be a sole proprietor and thinking of switching the business to the company form to reduce the taxes or enjoy its limited liability. Companies are of different types, which you would require to consider and register the company accordingly.
Key Terms You Must Know When Running A Company
There are some important keywords that you need to know if you are looking forward to setting up and running a company.
Articles Of Association
It is a legal document that explains the shareholders’ rights and directors’ power over the business. It is a set of rules to run the company agreed by the shareholders, directors, and the secretary of the company.
Memorandum Of Association
A memorandum of association is a legally binding document that is signed by the company’s shareholders and directors party to the business. It also includes their names and addresses. It serves to be a legal document that all the parties of the business agree to the formation of the company.
It is a written document issued by the company to the shareholders as proof of their investment in the company. It acts as a receipt for the purchase of the shares of the company representing their share of the ownership in the company. The information on the certificate includes certificate number, company name, company registration number, shareholder name and address, number of shares, class of share, date of issuance of shares, and amount paid for the shares.
Directors are not the owners of the company but are legally responsible for day to day running and management of the company. They are entitled to work in the best interest of the shareholders, and the company. Their responsibilities include hiring and supervision of senior staff, providing direction to the company and promoting the success of the company while avoiding conflict of interest.
Dividends are the distribution of the public limited companies’ some of their earnings to their eligible investors (shareholders). It is paid as a reward to the investors for their trust in the company and to incentivise the shareholders to continue holding or buying more stocks.
The accounting period is any time frame established by the management to use for accounting purposes and financial reporting. It is often a fiscal year or calendar year and also can be a week, month or quarter. It is used for the consistent preparation of the financial statements which can be then analyzed/compared by the investors and all other stakeholders.
Incorporation is the legal process by which a separate entity or corporation is formed. The resulting corporation is a legal entity that separates the firms’ assets and liabilities from those of the shareholders.
An incorporation certificate is a certificate that serves as evidence of the registration of the company with the Companies House, provided after fulfilling all the requirements. This certificate bears the name of the company, date of incorporation, limited by the shares or guarantee, company type, whether public or private and its office address. The certificate of incorporation is attested by the registrar of companies: sealed and signed.
Who Owns The Limited Company?
Shareholders own the company by its shares, while directors are responsible for its operation. Shareholders do not participate in the company’s decisions and management; it is done by directors. A director can also be a shareholder but is required to work in the best interest of the shareholders. Legally one shareholder and one director are required at the time of registration, which can be the same person. Moreover, having a secretary is not a legal requirement.
Who Is Responsible For Running The Company?
Directors and management team under directors run the company. They are responsible for the accounts record keeping, filing company taxes, purchase and sale of an asset, paying corporate tax, and all the required documentation. Directors can hire other people, such as managers, but they are still responsible for accounts and the overall performance of the company. Concluding, a director is responsible for working in the best interest of the shareholders and the company.
What Makes A Good Director?
Directors are responsible for the failure and success of the company. They hire, delegate the authority or responsibility of a part of the company and oversee their performance.
Roles And Responsibilities Of A Director
A director is responsible for the smooth run of the company. He or she is given some legal duties by the Companies Act, which are also mentioned in the company’s articles of association. Directors manage the day-to-day activities, deal with financial matters, and administer all the activities in the best interest of all the stakeholders.
Notification Of Change
Directors are responsible for updating the information at the Companies House when there occurs a change. The change can be of registered office address, a director, a secretary, a shareholder, company name, articles of association, or it can be about the issuance of new shares. Directors must ensure that all the changes are reported timely to the Companies House.
At the time of insolvency, the directors are first answerable to the creditors than shareholders. You are responsible for settling their claims before you pay anything to the shareholders. Breaching the duty to creditors can result in serious repercussions, and the court can offset the company’s liability by your personal assets. Moreover, it can disqualify you for the rest of your life.
Declaration Of Interest
In case a director has a private interest that can raise conflict with the company’s interest, they must follow the declaration of interest. The declaration of interest should be made prior to any conflict and is a guide for a time when a conflict may occur. It is expected to submit the declaration of interest annually, even if there are no conflicts existing.
Note: To learn more about a director’s responsibility, Read our dedicated guide on Director’s responsibilities.
It is the duty of the director to ensure that the company files the Confirmation Statement with the Companies House. Directors make sure that the information of the company like company address, shareholders’ names and addresses, directors’ information, and the company shares are written correctly.
The company requires you to follow strict record-keeping measures. The directors are tasked with keeping the company records up to date. These records are usually available and accessible to the public too at the office of the company. The records usually contain records of shareholders, guarantors, directors, financial statements, resolutions and minutes of the meetings, and charges claimed against the company’s assets.
Tax Filing And Annual Accounts
Directors have a responsibility to file company tax returns with HMRC to calculate their corporate tax liability. Also, they need to file the annual accounts with the Companies House. Make sure directors file returns and pay tax within the required time period for each. If you are just starting up and are completely new to the experience of being a director, you can appoint specialist accountants for startups, to help you with complicated accounting and tax matters.
Human Resource Acquisition
Directors hire people of different competencies to offer them relevant positions at the company. Hiring employees effectively is the directors’ job and is an important responsibility. The staff hired then runs the company, and the company’s success is truly based on their performance.
Costs Of Running A Company
It is essential to look into the costs of running a limited company when you plan to set up a company. In this section of the article, you will get to know the types of costs you might incur.
Your company comes into existence once it is registered. Currently, HMRC charges you £12 to register your company. The registration is usually done within 24 hours, and it can be done even earlier on the same day, paying a sum of £100. It can also be done through a professional accountant who can keep it cost-effective for you. But many entrepreneurs do it through a dedicated accountant to keep their residential address away from public record. Instead, the accountant’s office address is added, and they deal with HMRC and officials on the company’s behalf.
Once a company is set up, you still need bleeding finances which means that you keep funds to run your company. Let us discover them one by one.
Companies hire accountants for bookkeeping, tax planning, Companies House or HMRC correspondence, and updating the records in the best interest of the company. Accountants charge a fee for their services that can be fixed or variable. Here is some advice that you must ask regarding the hidden charges. Sometimes they charge extra for their office address usage, bookkeeping software, or personal taxes. It is much more cost-effective to have an accountant rather than manage it by yourself. The accountant is a master of their domain and eases your burden for the fee they charge. We call it fair trade.
Companies secure their assets, responsibility, and liability to third parties by purchasing different types of insurance. The type of insurance a business purchases depends upon the nature of the business. Some prominent insurances are professional indemnity, public liability, and employers’ liability.
The insurance costs vary depending on how cheap or expensive you buy for your business. It can start from £220 per year to more expensive and even more if you add on extras like cyber security or legal expenses insurances.
Company Bookkeeping Software
Companies keep their records safe and up to date by either having in-house software or hiring the services of an accountancy firm for providing the software. Some firms include bookkeeping as part of their packages, while others charge extra for this. Moreover, there are cloud-based solutions like FreeAgent for £145 purchased at the time of writing, Xero for a monthly payment of £10-£30, and Quickbooks and Sage basic packages for a monthly fee of £6 – £15, with more add-ons available.
Company Expenses, Taxes, and Fines
The company’s expenses include travel and parking expenses, logistics, marketing and promotion costs, training fees, office equipment, postage costs, office supplies, utilities, and entertainment expenditures. Some of these expenses are tax-deductible. Taxes include corporation tax of 19%.
Tax returns, tax payments, VAT returns, and RTI filings deadline for PAYE are among the most important dates to consider. If you miss, any of these can result in a big fine. Thus it would require you to meet these deadlines, or the cost of running a company would increase.
Companies House Confirmation Statement
Companies House charges an annual fee of £13 for the confirmation of the company details. It is an unavoidable and mandatory cost.
Company Tax Return
For a company, it must file company tax returns within 12 months after the accounting period ends with HM Revenues and Customs. It is mandatory to send whether you make a loss or have no corporation tax to pay. Sole traders do not pay this kind of tax but send self-assessment instead.
Limited companies are subject to 19% tax on their profits.
Penalties For Late Filing
The Registrar of Companies can charge the company a penalty for the late filing of accounts. Companies Act the UK has empowered it to charge a penalty of £150 – £1,500 seeing the status of the company and extent of lateness. If the company fails to file confirmation statements, annual returns, or accounts, it is taken as a criminal offence and can make the directors answerable for it and be fined severely in the criminal court.
IR35 for Disguised Employment
To clamp down on disguised employment, the government of the UK introduced IR35 in April 2000. The initiative was against individuals who set up artificial limited company structures instead of working as normal employees just to avoid tax.
A company providing the services of a staff member to a client on terms that the individual will be the employee of the client in absence of the intermediary company will fall within IR35 legislation. If your company is caught by IR35 then HMRC can tax your company’s profits in the same way as a salary.
How To Take Out Money From A Company?
We already discussed that a company is a separate entity and acts as an individual. So, all the finances that belong to the company can not be used or spent the way you spend your personal finances.
You can take money out of a limited company if it falls under the following subjects.
Taking Money Out Of A Company As A Director’s Salary
Companies can pay you a regular salary for the role of director, but it must be done through HMRC’s Pay as You Earn system. Under the PAYE system, you register the company as an employer.
Once the salary is paid to you, now it becomes your personal money, and you need to pay income tax and national income contributions on it depending upon the amount of the salary. For a company, the salary paid to a director can be deducted from the returns, so it does not pay any corporate tax on salary payments. However, the company will pay 13.8% Employer’s national insurance contribution on the salary earnings above £8,840 for the 2021-22 tax year, considered as NIC secondary threshold.
Directors playing smart with the tax rules only pay themselves salaries up to the threshold limit, £9,568, to avoid taxes and NICs. Since they are still earning above the Lower Earnings Limit, which is £6,240/year, they have to pay state pension and benefit entitlements. Moreover, to avoid only tax, you can pay yourself a salary up to £12,570, and will pay 12% Class 1 National Insurance Contributions on the earnings between £9,568 and £12,570.
As Dividends’ Payment
Companies pay the shareholders dividends based on the percentage of ownership of the company. Dividends are part of the profits and paid once all the expenses and taxes are deducted. You can pay yourself all the profit amount if you are the sole shareholder of the company.
Corporation tax of 19% is paid on all the taxable income. There is no tax on the first £2,000 of annual dividend income. Moreover, dividends are free from income tax and NIC. But you will have to pay the dividends tax for the amount above £2,000. The tax rate varies depending upon your income tax band; that can be basic rate, higher rate, or additional rate.
In the company form of business, dividends are paid to shareholders while announcing it in a board meeting. It is a must procedure to follow in the company.
As Directors’ Loan
Director Loan is the amount you have borrowed from the company and is repayable. Also, it can be the case that you lend money to the company and can claim it back at any time. Director Loan Account is the account where it has all the history and track record of the loan amount lent or borrowed. There is no such limit to how much money you can take out from the company but here are some points to consider when borrowing from the company.
- If you borrow less than £10,000, your company can have tax liabilities while you personally will be free of tax liabilities on it.
- If money borrowed from the company exceeds £10,000, you will have to mention it in the Self Assessment Tax Return.
- The deadline for repayment is nine-month and one day after the company year’s end, or it will cause you a heavy tax penalty.
- If a loan is repaid, then you can borrow another one after 30 days of repayment of the previous one.
Claiming Business Expenses
While running a business, sometimes we pay business expenses from our personal finances. Amount paid for business purposes can be claimed back for that you need to keep the receipts and bills as proof of payments.
Tax-deductible expenses include travel and parking expenses, meals, training fees, office equipment, postage costs, and entertainment expenditures. It can be reimbursed along with the salary or any other convenient interval of time. The company is required to keep all the receipts and bills for at least six years. Every year you fill out a P11D form that shows the expenses claimed. To avoid higher tax, you must mention expenses in your self-assessment tax return. While for a company to avoid tax on this money, it must include it in the employment section of its Tax Return forms. It will be considered an allowable expense, and HMRC will not charge tax on the amount.
Pros And Cons Of Running Your Own Company
We see that most of the businesses in the UK are of sole trader type. Yet we cannot ignore the advantages of a limited company. Here is the list of some advantages and disadvantages of setting up a limited company.
In the company form of business, you can enjoy a reduced tax rate. Personal tax rates vary from 20-45%, while the corporate tax rate is fixed at 19%.
Establishing your business as a limited company means that your business is now a separate entity with its own name, assets, liabilities, and legalities. It has no concern with shareholders’ personal belongings.
A limited company is one of the most attractive features of a company; shareholders’ liability in this form is only limited to the amount invested.
In company form, your business looks more professional for following the Companies Act rules. Clients trust you more for a more organized structure of the business.
Once you incorporate your company with Companies House with a unique name, then no one else can use your name. It is then protected by law, and you can sue if the company goes against it.
Transfer Of Ownership
You can easily transfer or give or sell shares of the company to others, that can be your relative, a friend, or an investor interested in the company. You can easily transfer the ownership of the company to your son or daughter if you retire.
Limited companies attract finances easily as compared to the sole trader business. It is because the lender trusts companies and can see their accounts and returns history on the Companies House website. Financers feel more confident to invest or provide loans to companies.
Disadvantages Of Running A Company
Here are some of the unavoidable cons of running a limited company are listed below.
- You must register the company at Companies House.
- The company bears a corporation tax of 19% to the Company House.
- It must submit tax returns and annual accounts at the HMRC every year.
- It needs to file a Confirmation Statement and annual accounts at the Companies House each year.
- The company incurs the cost of hiring an accountant to deal with tax matters.
- You follow a strict procedure when taking money out of the company as dividends or loans.
- Companies are required to keep their contact information, financial statements, and records accessible to the public.
A Comprehensive Guide On How To Run A Limited Company
Tips That Can Help Run Your Company Smoothly
Thousands of companies are established every year, but very few become successful. The major reason is poor planning and the gap between the plan and execution. Running a company is not an easy job and needs to consider many factors. Here is the step-by-step process explained to set up a successful company.
Before you launch any business, you must have a great insight into the following things about your business. Otherwise, a lack of clear understanding can result in the failure of the company.
- Target market
Once your research about the target market, product or service demand, and the competition allow you to start the business, then you can establish the company. Research is essential to ensure that the odds are in favour of starting a company.
Failing to plan is regarded as planning to fail. It is the very first step in setting up a company. You refer to this part when you do something about the company. A plan guides you on what to do while establishing and running your company. A plan acts as a blueprint of how your product will be designed or produced, placed, and marketed and how the whole idea will be converted into a prosperous business.
You might consider naming the company a simple task but not done right can make a mess and be subject to legal battles. It is recommended to name your company that relates to the business idea. Most importantly, make sure that the company name is unique, and no other company is registered with the same name.
We are required to run the company according to the rules and laws of the country. There are different licenses and permits required for different industries. You should also plan to buy the required licenses and permits to operate legally. You can refer to the government websites for the costs and procedures of the paperwork involved.
Hiring And Training
To run your business successfully, you need competent people in the team. Your business can be at the risk of failure if Inexperienced people are in decision-making positions. Thus you must ensure the important positions are filled by the right people. Hiring a suitable mix of people in your management team can bring innovation and diversity of ideas. After they are hired, train them to do their duties responsibly and make logical decisions about the business.
To penetrate and dominate the market, it needs to promote its products and services with unique selling points. Your business runs on the consumer’s and investors’ interest in your company. Promotion strategies include advertising and public relations. Moreover, the promotion for marketing can be done through personal selling, sales promotions, non-personal selling, and product placements.
For a company, it is expected to keep a correct accounting record of its business. It helps you and HMRC to calculate the returns and taxes. You need to keep a record for at least six years. Records include the copies of sales and purchase invoices, expenses claimed by the directors, petty cash expenses receipts, bank statements of the company, and all the copies related to the business expenses.
We hope you got an insightful view of all the ins and out of running a limited company. We covered how you can set up a company, what paperwork you need to do, how you register a company, what taxes and other fees can occur and what are the advantages and potential disadvantages of running a company. Now, knowing all this, you would feel confident about starting your own. You are just a step away from establishing the company and wishing you good luck with your new startup.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for its clients. He is of the firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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