Once you have made the decision to start your own business, you have to decide which type of business you want to form. Each type of business has a number of disadvantages and advantages and the type you decide to set up will depend on many factors. A sole trader is fairly simple to set up and run, with basic accounts and a self assessment tax return to be filed each year. However, a sole trader will be liable for the business debts if anything should go wrong. A limited company is more complex to set up and manage but has financial benefits and a limited liability for shareholders.
A private limited company is one of the more popular options for someone starting a new business, as a public limited company has far more legal requirements and restrictions. By setting up a private limited company, you will have tax advantages and your personal assets will be safe if the company is in trouble. Once a limited company has been set up, it is a separate legal entity, with your liability restricted to the amount invested in the company by you.
Prior to setting up the limited company, you need a registered office address which will appear on all documentation of the company. The address doesn’t have to be the company address and could even be your accountant’s or solicitor’s address. There are regulations for choosing a company name; the name can’t be the same or similar to an existing business and can be checked at Companies House. Sensitive or offensive words may not be used in a company name. A private limited company has to have one or more directors but doesn’t need to have a company secretary. Companies House will also need to know about the initial shares and capital of the company, along with details of shareholders.
There are documents which are required by Companies House and these include the Certificate of Incorporation, the Memorandum of Association and the Articles of Association. There are duties to be adhered to by company directors and the company secretary if you have one. Company registers have to be maintained by the directors, documentation has to be filed in a timely manner, meetings have to be arranged and notice given, resolutions and agreements must be filed and copies of accounts have to be distributed to all company members.
Once you have set up your company with Companies House, you have to inform HM Revenue & Customs; if you need to register for VAT or for PAYE, this should also be done at this time. Each year, a limited company has to complete a tax return for HMRC and Companies House and pay the Corporation Tax which is due. Accounts have to be filed with HMRC and Companies House and may have to be audited.
There are so many legal requirements and obligations of a limited company that it may be cost effective to outsource to a professional company. Although the setting up of a limited company is complex, there are many advantages. The rate of Corporation Tax is lower than the higher rate of income tax and this may reduce your tax bill. Forming a limited company may also add credibility to the business, giving confidence to suppliers and customers. A limited company can carry on trading even if a shareholder decides to resign or sell their shares.
The most beneficial aspect of a limited company is the limited liability which will protect personal assets, this should be carefully considered when deciding whether to form a limited company.
For further advice on how to setup a Limited Company see our guide here.
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