How to set up in business is always a big decision. Along with getting contracts signed and clients on board, the type of business you operate is an equally important question to consider.
There are three main types of business models to be aware of, sole traders <link to tax for sole traders>, partnerships, and limited companies. All three have advantages and disadvantages, so carefully consider which is right for you.
In this article, we outline your responsibilities as a director of a limited company and highlight some of the key information you need to be aware of if you want to go down the limited company route.
What are Director duties?
As a director, you are legally responsible for acting in the best interests of the company. Key duties include:
- Acting within the rules and limits set out in the company’s founding articles (corporate speak for rulebook).
- Making decisions based on the company’s best interests.
- Avoiding conflicts of interest or disclosing them fully when they occur.
- Avoiding personal gain from the company’s activities without proper disclosure. This simply means you need to properly declare your withdrawals from the company (dividends/salary/loans) in the submitted accounts.
- Exercising due care and skill, based on your expertise.
- Ensuring administrative tasks such as filing accounts and tax returns are completed on time (yes you read that right, ultimate responsibility for accounting tasks is down to the director rather than the accountant).
- Considering the interests of creditors in the event of financial difficulty, you could be held personally liable if the company cannot settle its debts (this is very rare).
A lot of the above is more applicable to larger companies where the directors and shareholders are not the same people. However, the general principles and expectations remain the same even for single director/shareholder companies. It is worth considering the above duties if you ever want to appoint someone or become a company director yourself.
What are my filing responsibilities?
What we discuss below veers on the technical side but stick with it, as it’s all very relevant. As mentioned above, as a director it is your responsibility to ensure all necessary documents are filed with the relevant authorities in a timely manner. While your accountant can assist and provide reminders, the ultimate responsibility rests with you.
There are usually two organisations that need to be informed of the company’s financial status:
1) HMRC
A corporation tax return (CT600) and full statutory accounts (including a detailed profit and loss statement) must be submitted to HMRC within 12 months of your year-end. Corporation tax is typically due nine months and one day after the year-end. Your company may also need to file payroll and VAT returns as necessary if you are registered for either.
2) Companies House
You must file statutory accounts within nine months of the year-end. For small or micro-companies, you may submit abbreviated accounts, which have fewer reporting requirements and do not require a statutory audit (another accountant double-checking everything adds up).
Additionally, you’ll need to file a Confirmation Statement annually to update key details like shareholders and directors. This costs £34 and can be done quickly and securely online.
Is the company’s money my money?
As a sole trader, there’s little distinction between your personal and business finances. Essentially, your money and your business money are the same. However, in a limited company, the company is a separate legal entity with its own finances. While you may own the only shares in the company, you do not directly own its money. The same is true in reverse, i.e. if the company owes HMRC some tax money, in the majority of cases, you’re not liable for it – your company is.
Careful consideration is needed when withdrawing funds in a single director/shareholder setup. These are the four main ways the company can send you money:
- Salary (subject to PAYE and both Employee and Employer National Insurance Contributions)
- Dividends (requires board meeting minutes and dividend vouchers)
- Loans (be cautious not to owe the company at year-end, as this could lead to additional tax charges)
- Expense Reimbursement (only available if you pay for a company expense on your personal card)
What are my tax responsibilities?
Company
When you establish a limited company, it will need to pay Corporation Tax. This amount is variable and based on taxable profits in a given period. If you want to know more about the Corporation Tax rates your company will be paying, you can read more about information in our beginner’s guide to tax for limited companies.
Personal
As the owner of a small, owner-managed company, you’ll often control your remuneration strategy (how you are paid). To minimise both corporate and personal tax liabilities, it’s important to consider the most tax-efficient way to withdraw money. Paying yourself a large salary may not be the best approach, as it could result in both personal income tax and National Insurance Contributions (NIC) for both you and the company.
An alternative is to pay yourself via dividends, which typically incur lower tax rates and no NICs. However, dividends are not a deductible expense for Corporation Tax, meaning the company will pay more in tax on profits. A common strategy is to take a salary up to the NIC threshold, maximising tax efficiency while still contributing toward state benefits, and then take the remainder of the income as dividends.
What are shares and what do they mean for me?
The owner of a company’s shares controls the company. If there are multiple shareholders, ownership and control are shared. Different types of shares, such as ordinary or preference shares, may also exist. Ordinary shares typically come with voting rights and entitlement to profits but may be riskier if the company fails. Preference shares offer a fixed dividend but generally come with less control over the company, so not much use for an owner managed business.
Is a limited company right for me?
It’s never been easier to set up a limited company than it is now. You can typically find an agent online who will handle the setup for a small fee if you instruct them. However, before jumping into anything, it’s crucial to fully understand the responsibilities involved. Limited companies offer many benefits but may not be the right fit for everyone. Make sure to consider your circumstances carefully and, ideally, discuss with an accountant/professional to ensure a limited company is the right fit for you.
Maslins offers complete accounting solutions for limited companies across the UK. Explore our Limited Company Accountancy Packages to see how we can help. Or get in touch and talk through the options with one of our friendly team.
