Many small business owners setup Limited Company’s without understanding what they are letting themselves in for. As a sole trader, life is relatively simple. You and your business are the same thing. If you form a Limited Company, you have created a separate legal entity to yourself. They are cheap and quick to set up, but consider it a bit like getting a puppy…it’s a big responsibility to take on, independent of the initial cost!
This page sets out your obligations as director of a Limited Company. It touches on some differences to sole traders, however, for a more full discussion of these, please visit our sole trader vs limited company thread.
- The Limited Company’s Money Is NOT Your money
- Tax – Corporation And Personal
- Shares – What They Are And What They Mean
- Director Duties
- Filing Responsibilities
The limited company’s money is not your money
As a sole trader, there is no significant difference between the money in your personal bank account and your business bank account (if you even had one). You can put money in and take money out as you please, because it is all your money.
This is not the case when you trade via a Limited Company. The Company is a separate legal entity to you, and has its own money. It can also borrow money in its own name, though if you wish to do so you would often be required to offer a personal guarantee (ie if the company cannot repay the debt, you will).
If you own the company, you do, of course, indirectly own the money of the company. You therefore have significant control over what it does with its money…but care must be taken when withdrawing it.
When withdrawing funds, it must either be:
- a salary payment (attracting PAYE and National Insurance Contributions)
- a dividend (for which minutes of a board meeting and dividend vouchers must be drawn up), or
- a loan (take care not to owe the company at the year end…this can lead to further tax charges)
Tax – corporation and personal
Upon forming a Limited Company, there is a new tax at play – Corporation Tax. This is charged on the taxable profits of the company, at 19% (at time of writing), and is due 9 months and 1 day after your year end.
For small, owner managed companies, the owner will normally be in charge of the company’s remuneration strategy. It is therefore worth considering how best to extract funds from the company, whilst minimising and delaying both corporate and personal taxes as much as possible.
Paying yourself via a high salary is often not the most tax efficient method. On top of your personal tax (currently at 20% or 40%), you will be liable to employee national insurance contributions at 12% on your annual earnings between (broadly speaking) £9k-46k, and 2% on those above. In addition to this, the company will suffer employers national insurance contributions of 13.8% on all salary in excess of ~£9k. On the plus side, both the salary itself and the employers NICs are deductible expenses for corporation tax.
The main alternative is to pay yourself a dividend. This is NOT an allowable expense for corporation tax purposes (hence you will pay more corporation tax). However, they attract no national insurance contributions, and are typically taxed at a lower rate than salary (suffering 7.5% in the basic rate band, and 32.5% in higher rates up to £100k total income).
Often the most tax efficient method is to take a salary up to the NIC threshold (which attracts no personal tax/NICs, but is deductible for corporation tax and also counts as a qualifying year for state benefits) and the rest as dividends.
Note also that as the owner of a Limited Company, you do not need to distribute all profits. Some can be left within the company. They will therefore only attract corporation tax, not personal tax as well.
Shares – what they are and what they mean
The owner of the shares owns the company. There may be more than one owner of shares, meaning the company is jointly owned. The owner of the most shares will typically have the most say, and rights to the most dividends.
There may also be more than one type of shares. This may be several types of ordinary shares (ordinary “A” shares & ordinary “B” shares for example), or shares may be preference shares. We’d recommend against this unless you’ve got a good reason for doing so. If not, “KISS” applies.
Ordinary shares are the most common. They tend to have control over the company, along with a right to the bulk of the profits if the company succeeds. They will also, however, typically be the last in line to get their money back if the company fails.
Preference shares are like a halfway house between ordinary shares and a loan. They are typically entitled to a set % preference dividend, based on the amount invested. These are payable before ordinary dividends. Therefore if the company does extraordinarily well, the preference shareholders still simply get their X%/year return. If the company fails, preference shareholders will get their capital back before ordinary shareholders, but after any creditors (eg normal loans and interest would be paid before preference shares and their “interest”).
As a director of a Limited Company, you owe a duty of care towards it. In particular you must:
- Only act within your powers – as granted by the memorandum and articles of association
- Act in the best interests of the company – using all knowledge available at the time
- Avoid conflicts of interest – where unavoidable, disclose in full to the board
- Not make a secret profit – any personal gain made from the Company’s activities should be disclosed
- Exercise due skill and care – based upon your own specialist skills
- Keep up to date with all administrative tasks – including filing of accounts and tax returns
- Act in the interest of the creditors if the company may not be able to repay its debts – or you could become personally liable
As director it is your responsibility to ensure all the correct documentation as required is filed with Companies House and HMRC on time. It is NOT the responsibility of your accountant, although of course they should assist you where possible and provide reminders to help.
Statutory accounts which comply with the Companies Act must be filed with Companies House within 9 months of the year end for private Limited Companies. The fines for missing these deadlines can be very significant for small businesses, so ensure you get yours in nice and early.
If you are a micro/small company, only abbreviated accounts need to be submitted. These have reduced disclosure requirements, including there being no need to show a profit and loss account.
Your confirmation statement must also be filed with Companies House. This keeps details such as the main shareholders and directors, as these are not always constant. There is a £13 charge to file this online.
A CT600 (corporation tax return) and corporation tax computation, along with a copy of the full statutory accounts (ie not abbreviated – must have a detailed profit and loss account) must be filed with HMRC within 12 months of the year end. Note however that any corporation tax due is payable a bit earlier, typically 9 months and 1 day after the year end.
Your company may well also need to file payroll and VAT returns, dependent on it being registered for those taxes.
Forming a company is so easy, maybe £20 to an online company formation agent and it’s done. Unfortunately many people don’t realise the responsibilities that come along with it. Limited Companies can be extremely useful, but don’t set one up until you’ve considered your situation fully and are sure it’s the right move.
Maslins offer complete accounting solutions for Limited Companies across the UK. Take a look at our limited company accountancy packages.