A limited company may sound daunting to set up, but once you understand the basics, it can make a lot of business sense. In this article, we’ll look at what a limited company actually is, how it works, and whether it’s a good idea for you, including:
- The pros and cons
- Whether it saves you any tax
- If it actually protects you (and your house) if it all goes wrong
What Actually Is a Limited Company?
At its most basic, a company is simply an entry on a public register, and some key legal documents. In law, all of us agree to treat the company as if it were a “thing” (entity) in its own right. As a result, a company can:
- Sign contracts
- Own property, stock, machinery and vehicles
- Have (and pay) its own tax bill
Owning and Running A Ltd Company
Every company must have at least one owner, who usually is the main shareholder and has the majority of the company shares. A company can also have multiple owners, all of whom are shareholders and own a specific % of the company. If you’re the only shareholder, or all shareholders agree, you can sell the company on to someone else to become the new owner/s.
A company also has people to run it and be responsible for it. These are the directors, who are often also the shareholders, but you can be only a director, or only a shareholder, or both.
Limited Companies and Liability
As a legal entity, your company has a very special feature: limited liability. While the directors are legally responsible for it, if the company gets in trouble, the company is stuck with the consequences.
For example, if your company runs up debts and can’t pay them, in most cases it’s the company’s problem. The people the company owes money to can’t come to you as a director or shareholder, and ask for you to pay the debt. The liability for the debt is limited to the company – hence the name.
Limited liability is a really powerful feature of a ltd company as it protects you, your family and your possessions such as your home from the inherent risks of being in business. It’s not always 100% bulletproof though. For example, if the company wanted to borrow money from a lender, you might be asked as a director to sign a personal guarantee that says if the company doesn’t pay, they CAN come to you and demand their money.
Downsides To Owning A Limited Company
One of the most frequent questions we get asked as business accountants is “Are there hidden downsides to ltd companies nobody talks about?” The short answer is yes, but it depends how much you weigh these disadvantages over the tax benefits and other advantages.
– Downside #1: Being on the Public Register at Companies House
Your company is on a public register, so certain information about the company and yourself as a director/shareholder is available for all to see. You can check any company out at the Companies House website.
This publicly visible information includes your age and nationality as a director and/or shareholder. It also includes the company accounts as submitted each year to Companies House. As a small business, you don’t have to disclose all your sensitive numbers like turnover or expenses, but some things will still show such as the money in your bank at the company year end.
On the plus side, seeing your business on a public register can help potential customers feel more confident about your business. Being listed at Companies House alongside every other ltd in the country can help suppliers and customers feel your business is slightly “bigger” or more professional.
– Downside #2: Cost of preparing accounts
The accounts submitted to Companies House do come at a cost. You’ll either need to pay an accountant to prepare and submit them, or buy commercial software to do this yourself. (See Dan’s video on this subject here).
The challenge is that if your company doesn’t generate a healthy profit, the fees for getting your accounts done can add up. You also need to pay an annual return fee to Companies House, which is £50 (at the time of writing). You’ll also need to prepare/pay for someone to do your company accounts for your corporate tax return.
Taking Money From Your Company
The most important thing to remember about a limited company is that the money the company earns is the company’s money. Not yours.
So you’ll need a separate business bank account, so your own money and the company’s money don’t get muddled up. It makes your year-end accounting far less painful too. Our founder Dan Heelan recommends a Revolut Business account as it is quick to set up, and offers some great quality of life banking features.
For you as the owner or director to take legally money from the company, you need to follow strict rules. The two main methods are:
- Paying yourself a salary as a director
or
- Taking profits out as a shareholder, known as “dividends”
There are lots of videos at our YouTube channel to help you understand how to pay yourself, what your options are, and what the pros and cons are of both payment methods.
Saving Tax as a Limited Company
Here’s the crunch question we get asked a lot: “how much tax can I save by operating through a limited company?” The short answer is “it depends”, but be aware that limited company status is not the automatic cash bonanza people assume, and it’s not right for everyone.
In the past, there were such obvious and large tax savings from just being a limited company that many owners did it automatically. This used to happen because of a combination of low company tax rates and lower income tax rates on dividends. However, successive governments have dramatically eroded the automatic savings and so it’s now a much more complex scenario.
Having said that, the vast majority of Heelan Associates clients own limited companies because of the tax savings they offer, so it’s still worth it in many instances. For example:
- Being a limited company can be far better if paying less tax is a goal.
- There are tax deductions in terms of expenses a company can pay for.
Timing the setting up of a limited company is important, so here’s a video talking about exactly that – when you should go limited.
Quick Quiz Break
To help you work out if a limited company is right for you, I’ve created a quick quiz. It takes 2 mins to complete, and will give you a percentage of how likely a good idea a limited company is for you.
Going Limited: Do I Have A Choice?
Sometimes you don’t really have a choice about being a limited company or not. It’s often down to a combination of “market forces” and customer perceptions.
For example, if you are providing consultancy, or labour only, your client will sometimes insist you are a limited company. This can make their lives easier either in getting you through their vendor approval systems or because they believe it helps shield them from potential employment status problems.
This can also apply to new e-commerce stores, for example, as some selling platforms appear to prefer you to be a limited company before you sign up.
How Do I Open A New Limited Company?
It is remarkably easy to open a limited company. You generally have two options:
Option 1
Form it directly with Companies House. Pay them their fee.
or
Option 2
Form it via a third party, and pay them their fee plus the Companies House fee. A third party can be accountants, like us, or companies that just do formations.
Option 2 is usually better because you don’t get all the required legal paperwork supplied when you form a company directly with Companies House, such as your Company Registers. (For more details see this video)
Whether you are doing it yourself via Companies House or using a third party, you will still need to:
- Set yourself up with Companies House
- Verify your identity as an individual
- Get a special personal ID code
You can then apply for a company, using the code when prompted. It only takes about 24 hours from your application to your company registration going live, so it’s a pretty quick process. However, it literally pays to take your time, do more research and/or get professional help when forming a company, as there are a few ways to set your company up at this point to save tax in the long-term.
How Easy Is It To Close A Limited Company?
One nagging worry that in our experience puts people off starting a limited company in the first place is: what if I set it all up and then it doesn’t work out? Am I stuck with it forever?
You’re not. If you ever need to close it down, there’s a clear, defined process to do so. Presuming you aren’t in trouble and need a liquidator to help, you simply need to:
- File your final company accounts and tax returns
- Ensure the company doesn’t owe anyone money, especially HMRC
- Deal with any cash, equipment or stock left in the business
- Plus a few other items to make sure it’s properly wound down
Once this is done this you can normally “strike it off” using a simple form and payment to Companies House. You then have to wait a few months from Companies House to confirm it’s been closed.
Next Steps: Setting Up Your New Limited Company
Registration is often the easy part. The next part of the process in actually setting a new company up properly is where most people trip up. This includes not considering:
- The startup costs nobody seems to budget for
- The challenges of VAT
- How to hire your first employee
- Managing payroll and paying yourself
For more information on the above, see our videos and blogs. If you are already have an accountant, ask them for help with questions such as:
- “Should I stay a sole trader or go limited?”
- “Is a limited company worth it for a side hustle?”
- ”Do I need a limited company before I start trading?”
- “When should I move from sole trader to limited company?”
If your accountant can’t answer them, contact us here at Heelan Associates. We have helped over 3000 thriving small business over the last 20 years.
About the author
Dan Heelan is the Business Services Director of Heelan Associates, an accounting firm that helps small business owners across the UK start, survive, and grow.
With a background as a small business owner himself, he discovered his passion for accounting and tax early in his journey and now focuses on empowering fellow entrepreneurs with the knowledge and tools to navigate the financial side of running a business.
You can see and hear Dan in action in his regular: