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Limited Company Beginners Guide Starting a Limited Company 2 Starting a Limited

Limited Company Beginners Guide Starting a Limited Company 2 Starting a Limited Company Contents Introduction What is a limited company? What are the benefits of being a limited company? When is the right time to start a limited company? Setting up a limited company in four simple steps Your duties and responsibilities as a director Maintaining your limited company accounts Claiming business expenses Paying yourself PAYE / National Insurance Preparing and filing returns Claiming back pre-trading expenses What is IR35? Important filing dates How Crunch can help 3 4 6 8 10 14 17 19 21 23 24 26 28 30 31 3 Starting a Limited Company Introduction Setting up as a limited company is one of the smartest and most tax-efficient ways to get paid for your work. With a limited company set-up, you get to define your brand, own everything you do, run your business in the most tax-efficient way, and pitch for work you wouldn’t be able to get as a sole trader. If you’re not quite sure what it all entails, and you’re ready to learn how to set up a limited company, here’s what you need to know. 4 Starting a Limited Company What is a Limited Company? A limited company is one of several legal structures a freelancer or contractor may choose to run their business – the other common structures being sole trader or working through an umbrella company. A limited company, broadly speaking, is a legal structure for a business in which the liability of each shareholder is limited to their individual investment – this is known as limited liability. In the UK, limited companies are governed by the rules and regulations contained in the Companies Act 2006, and all company registration and records are managed by Companies House. There are three types of limited companies structure to choose from: Private & limited by shares (LTD), Private & limited by guarantee, and Public Limited Company (PLC). 5 Starting a Limited Company Private & limited by shares (LTD) Most small businesses or SMEs are private companies limited by shares. This means the company is financed via share capital (shares) and profits are distributed amongst shareholders with equivalent monetary values attached. In the case of a freelancer, usually 100% of the company (indeed, there is often only one ‘share’!) will usually belong to that individual. Private shares cannot be sold on public markets, and the cash value of the shares may rise and fall depending on the success of the company. If you’re a freelancer operating a limited company, you will usually follow the private company limited by shares structure. Private & limited by guarantee A company limited by guarantee tends to operate in the charitable or voluntary sector. The company is not looking to return profit to its members and seeks to retain profit in the company or use it for other (usually charitable) purposes. Shares are not usually issued by these companies and its members limit their liability to a fixed amount (the ‘guaranteed amount’). The company needs to be registered with Companies House in the usual way. Public limited company (PLC) This is a company with shares traded on public markets (i.e. FTSE 500, NASDAQ). Often a private company limited by shares will “go public” once it reaches a certain size, and the company’s shareholders will be able to offer their shares for sale to the public, with the proceeds of the public sale going to the original shareholders. 6 Starting a Limited Company What are the benefits of a limited company? Here are some of the main reasons a limited company structure might be given the nod over other structures such as being a sole trader. Protection through limited liability Taking calculated risks is part and parcel of doing business, whether you’re a sole trader or a limited company. If you run your business through a limited company, any debts are the responsibility of the company. No personal liability arises from the company’s operations. This contrasts with the situation for sole traders, where any debts remain the responsibility of you personally and must be paid even if your business makes a loss. One exception to these rules for a limited company concerns fraud. If the company’s creditors lose money through a fraud you’ve committed as a director, you’ll be personally responsible and will likely face criminal charges.. 7 Starting a Limited Company Tax and National Insurance efficiency Given Benjamin Franklin’s famous quote that the only two certainties in life are death and taxes, any opportunity to lower tax payments is always a welcome one. As a director of a limited company, you decide how much salary to pay yourself and the amount of dividends to take out of your company’s retained profit. If you pay yourself a low salary and most of your income from your company is dividends, you’ll still accrue qualifying years towards your state pension without paying any employer or employee National Insurance Contributions (NICs). Dividends attract less income tax than salary and aren’t subject to NICs, whereas a sole trader’s entire income is subject to NICs. Changes to the taxation system have gradually eroded some of the benefits of taking income from your company in the form of dividends. However, there are still some worthwhile advantages. The latest rates and some worked examples are shown in our article “What tax do I pay on dividends?”. Improved reputation/ credibility Confidence is critical in business and a limited company presence can promote confidence in your business among your customers, making you seem more professional. Some clients – large corporations and those in the financial sector especially – simply prefer to work exclusively with limited companies, indeed many companies won’t work with sole traders at all. So, having a limited company can present new business opportunities to exploit which may not be available to sole traders. 8 Starting a Limited Company When is the right time to form a limited company? Whether you work as a sole trader or contract via a limited company, each option has its pros and cons as discussed above. A typical scenario is for someone to start contracting or freelancing as a sole trader for its ease of set-up and reduced administrative burden. As the business grows and hopefully earnings increase, they may then consider forming a limited company to reduce the amount of tax payable and increase their attractiveness and professionalism to potential clients. The common consensus is that while your earnings remain low, it’s best to remain a sole trader. As a low-earner your tax and accounting responsibilities will be very simple – simple enough to do it yourself. 9 Starting a Limited Company Tax rates and thresholds change each year, so it’s important to keep on top of things. At Crunch, we usually find that once your business profits reach £35,000 per annum, you could save money and pay less tax with a limited company setup. The savings can get substantial as your profits increase, but keep in mind, you will have other expenses to pay as a limited company. We have a handy Take-Home Pay Calculator that can give you an estimate of the savings you could make and estimates your take-home pay. 10 Starting a Limited Company Setting up a limited company in four simple steps 1. Choose which type of limited company to set up Once you’ve decided to set up a company, you have to choose which type you wish to form. The two main choices are: • Private Limited Companies (LTDs) • Public Limited Companies (PLCs) Most freelancers, contractors, start-ups, and small businesses will opt for a Private Limited Company, as PLCs must have a minimum share capital of £50,000, at least two shareholders, two directors and a qualified company secretary. There is no minimum share capital requirement for LTDs. You can set up a LTD with a single share worth £1 if you wish. 11 Starting a Limited Company 2. Pick your business name This bit is equal parts the most fun and most frustrating part of the whole process for most new limited companies. Much like a web address, your company name has to be unique. You can differentiate in a few ways to guarantee a unique name – for example, a limited company name can use either “Limited” or “Ltd.” (i.e. “Crunch Limited” or “Crunch Ltd.”). You can find available company names using our Crunch Formations company name checker, but with over 1,500 companies formed every day, your preferred name may not be available. Stuck for ideas? Here are some ways to create unique company names. 3. Forming a limited company If step two was the fun and frustrating part, this one’s the tricky and bureaucratic part – or at least it’s seen to be. It’s actually really simple if you’re organised though. With Crunch, you can go online and set up your limited company yourself in about ten minutes, and all for the cost of a takeaway pizza. You just have to uploads/Finance/ limited-company-beginners-guide-starting-a-limited-company.pdf