With around 4.6 million people now working for themselves in the UK, many people will want to explore their options in terms of how they run their business. Not their day job – the actual workings of the business.
Freelancers, contractors, startups and small businesses might be curious about setting up as a private limited company whether they are brand new or existing firms.
Why set up a limited company?
Setting up a limited company offers protection against personal liability. If you’re a sole trader and your business goes bust, you’re personally liable for its debts. If you can’t pay up, you risk personal bankruptcy.
Being a limited company is also tax efficient because you can organise your salary to be paid at a level within the basic rate tax band. Any payments over and above can be paid from the company as dividends, which means overall you pay far less tax.
In terms of succession planning, having a formal structure can help when it comes to dividing up the business among family.
In general terms, it is not beneficial to be a limited company if your profit is below £30,000 per annum.
Need to finance your new company? Read five tips for applying for business loans.
How do I set up a limited company?
You will need to register with Companies House, which requires basic information.
You must also create a memorandum of association, which is the agreement of all initial shareholders to create the company, articles of association, which details how the company is run, and a completed IN01 form to Companies House.
Once the company is registered you’ll get a ‘Certificate of Incorporation’. This confirms the company legally exists and shows the company number and date of formation.
How much will it cost?
You could register the company yourself online for around £15. But creating the other legal documentation might be something you want professional help with.
An accountant could charge around £300 – but it differs greatly between firms, so shop around. Regardless of whether you are setting up a business or considering restructuring, a visit to your tax adviser should be high on your agenda. It will cost you, but it will be worth it in the long run to get things right with the taxman.
Don’t forget ongoing costs associated with a limited company. So make sure you get these in writing from your accountant at the outset.
What responsibilities will I have?
Limited companies must have at least one director and one shareholder – this can be the same person, which is why many one-man-bands are able to set up a limited company.
Directors are legally responsible for the company. They must also ensure accounts are filed with Companies House each year. Private limited companies no longer have to appoint a company secretary.
Help is at hand from Government sponsored websites but getting advice from an accountant is the right route if you aren’t confident about making the decision, and making the move, alone.
Visit unbiased.co.uk to find an accountant in your area.
Not for you? Read our guide to setting up as a sole trader.