Starting a business as a sole trader is, without a doubt, the most straightforward method in the United Kingdom. All you have to do is tell HMRC that you’re self-employed and account for your company operations using the yearly self-assessment tax system.
Setting up a limited company is slightly complex than a sole trader. The financial and administrative duties of maintaining a limited company are more too.
But both have their pros and cons. Let’s explore these in more detail.
Table of Content
1. What is a limited liability company?
A company is an artificial person. It is accountable for all it does on its own, and its funds are distinct from your money.
As a legal entity, it can engage in contracts in its name and can sue and be sued upon. Business transactions are carried out on behalf of the firm, not the owners.
Limited liability protects the company’s owners or shareholders. It implies they are not liable for business debts beyond the money they invested in the business.
After paying the corporation tax, the firm owns whatever profit it makes. The firm can distribute its earnings to the shareholders in dividends.
At least one director must administer the firm, follow all rules, and keep formal documents and registers.
Check our blog post on : What is a Personal Service Company?
2. How can I form a company?
There are various options for forming a limited liability company.
You can submit your application through two modes:
● electronically through the Companies House website or
● manually using Form IN01.
You can hire an accountant to handle the entire application process for you.
Companies House charges a set £12 fee if you apply online and a £40 fee if you use mail.
Some of the documents or information to keep handy before you start are as follows:
● Company name
This should be distinctive and free of any ‘sensitive’ terms or phrases- for example, you can’t include a trademark in your name or pretend to be someone you’re not.
● Registered office address
You must have a physical address to which official mail can be delivered.
Many contractors use their residential addresses for this purpose, but you may also use a third-party service or even your accountant’s corporate address.
● Share structure
You must determine how your new company’s shareholdings will be distributed. Will you own all of the shares, divide them with your spouse, or share them with others?
It’s a good idea to talk to an accountant about the best approach to set up your company’s share capital.
● Shareholders
You’ll need the name of each shareholder, as well as their complete address, share class, and the number of shares they possess. You will also be required to give their details like their passport number (or National Insurance Number), birth town, among other things.
● Officials from the company
A minimum of one director is required to set up a company. Although it is no longer necessary, you may choose to hire a business secretary. You must have all of your officials’ names, residences, nationalities, and dates of birth available when you apply.
3. What are the advantages of forming a company?
The following are the main advantages of forming a limited company:
● Separate legal entity
A limited corporation exists independently of the owners. Everything from the corporate bank account to asset ownership and participation in tenders and contracts is strictly company business, apart from the shareholders’ interests.
● Limited liability
When you run your firm as a limited company, you benefit from ‘limited liability.’
Suppose your firm faces some financial losses. In that case, you will not be personally accountable for it.
Those who manage a business as self-employed are not protected against financial claims in the same way. If something goes wrong with a sole trader or partnership, the owners are individually accountable for all of the company’s debts and obligations.
● Tax
For many, one of the most significant benefits is that doing your business as a limited company allows you to pay less personal tax than if you were a sole trader.
Profits earned by limited companies are subject to UK Corporation Tax, which is presently fixed at 19% (rising to 25% in coming years).
Your profits as a sole trader are subject to NIC laws. As a result, operating your firm as a limited company may allow you to keep more of your profits.
● Professional
A limited corporation can create a more professional image in several enterprises and sectors.
When dealing with larger corporations, you may note that they prefer to work with limited liability companies rather than sole traders or partnerships.
● Naming
Your company name is legally protected once you register it. No one else may use your name or anything too close to it.
4. What are my chances of losing money if the company fails?
If there is a formal insolvency proceeding, the companies’ directors are not liable or accountable for the companies’ debts. But in some exceptional cases, one or more directors may be held responsible (on the creditors’ behalf) by the court for the company’s debts.
After COVID-19, the government is making changes to these laws and making directors accountable for accessing COVID-19 grants illegally.
5. Are there some other things I should keep in mind?
Here are some more things to think about while forming a limited liability corporation for the first time:
● You should learn about the legal and financial responsibilities of directors.
● Learn what statutory records are and how to keep them up to date. For additional details, see this article.
● Within three months of conducting business via your firm, you must register for Corporation Tax. It’s also possible that you might need VAT registration.
