There are a number of things to consider when it comes to starting your own business and near the top of the list will be choosing the most suitable trading option.
For those looking to incorporate a limited company, as opposed to registering as a sole trader or partnership, one of the most important benefits is that the owners of the company (i.e. the shareholders) are only liable for the amount of money they have invested in the company and not for any company debts or losses. This means that if the company runs into financial difficulty, the owners' personal assets are not at risk.
Financial benefits of a limited company
Incorporating a limited company makes it easier to raise capital as the owners can issue shares to raise funds.
As a separate legal entity, a company can enter into contracts such as employment contracts, property leases, and other business transactions in its own name, which helps to protect the owners from personal liability. This is why it’s important in the first instance when deciding which trading option is the best way to run your business, to consider the risks you may face as a business owner. If something were to go wrong, what would happen?
Incorporating a limited company provides additional tax advantages. The company is taxed as a separate legal entity, meaning that any profits generated by the company are taxed at the lower corporate tax rate rather than the higher personal income tax rate. The corporate tax rate is however dependent on the level of taxable profits in the company.
Being separate from your business also provides you with more flexibility over your personal remuneration. You can pay yourself a salary and also have the option of paying a dividend out of the company profits, which is more tax-efficient and can be taken at the most tax-advantageous time. On 6 April 2024, the annual dividend allowance dropped from £1,000 to £500.
How do I incorporate my business?
There are three ways to incorporate a limited company – through electronic software filing, online or paper filing. The quickest and easiest way is to set up a limited company online. This way your company will also be registered with HMRC for Corporation Tax and optional PAYE.
If you are not incorporating your company online, you’ll still need to register your company with HMRC, in order to set up a payroll, pay Corporation Tax and register for VAT. Failure to register could result in a fine. You’ll be sent a Unique Taxpayer Reference (UTR) to enable you to do this once you’ve become a limited company.
You’ll also need to get insurance, set up a business bank account, install accounting software, and it might be advisable, if there is more than one shareholder, to have a shareholders’ agreement written up.
Responsibilities as a company director
It does, however, mean there are more reporting and management responsibilities you must uphold to avoid being fined, prosecuted or disqualified from being a company director.
In many SME businesses, the directors and the shareholders can be the same person/people and so these duties will go unsaid, but when faced with financial distress, their duties as a director swing to stakeholders as a whole, including creditors i.e. those people to whom you owe money, rather than just the shareholders.
Depending on the size of your business you may have added responsibilities of being an employer and will need to run a payroll, pay National Insurance and provide workplace pensions, as well as take into account the costs of holidays and sick pay.
With so much to consider, it can be helpful to have some support when starting a new business or indeed incorporating an existing business. If you would like advice, please get in touch.
