What is a Limited Company?
A limited company is a business which is registered with Companies House. It's separate legal entity to it's owners and has it's own responsibilities and accountability.
Many small businesses are run as companies. Many are owned & managed by just one or two people. The business name will end in 'Limited' or "Ltd', distinguishing it from a sole trader or PLC (Public Limited Company)
When your managing a limited company, you need to visualise it as a separate entity to yourself.
Directors and Shareholders
When a limited company is formed at Companies House, a director has to be appointed. This is the person that will run the company. He or she acts on behalf of the company.
Upon formation the company will also issue shares. The shareholders own the company.
If you are a very small company, it's highly likely that you'll be both the shareholder and director, therefore having full control of the business.
Shares often come with voting rights which allows shareholders to make changes to the company, such as removing directors. It is therefore essential when issuing shares that you're happy who your shareholders will be.
Director's also have a number of responsibilities in law such as:
- keep an honest and transparent record of the company's accounts
- ensure that all returns and accounts are submitted to HMRC & Companies House on time.
- keep the company's statutory records and report any changes to Companies House and HMRC, such as registered address, directors, shareholders etc.
- make decisions that are in the interest of the company and not you. It's a strange concept if you're a sole director/shareholder but a decision in which you benefit personally make be detrimental to the company.
Be warned, HMRC and Companies House take director's responsibilities very seriously and can fine you personally up to £5,000 if you don't uphold your duties. This isn't an empty threat either. Over 1,600 directors are prosecuted each year!
In addition to the above, one of the key differences between a limited company and a sole trader is that trading via a limited company offers it's owners limited liability.
This means that the debts of the company belong to the company, not it's owners. So, for example if you company sadly fails, shareholders are not personally responsible for the debts of the company. Please bare in mind that if you act as personal guarantor for any business loans/finances you will be personally liable.
Dividends & Salaries
If the company makes a profit, it can decide to issue a dividend to it's shareholders. A dividend is a distribution of profit and is paid in equal amounts to share held. If one shareholder owns more shares than the other, they'll receive a higher dividend.
Dividends can only be issued if there is enough retained profit in the company after tax and expenses have been deducted. Illegal dividends occur if too much profit is distributed in error. It's therefore essential that a limited company's accounts and records are kept up to date to avoid any legal issues.
It's normal for a director to be paid a salary from the company. The amount a director is paid varies on their personal circumstances & the financial situation of the company.
Our accountants can advise you of the most tax efficient balance of salary and dividends to draw from your company each year to suit your personal circumstances.
Each year a limited company has to pay Corporation Tax. This is calculated as a percentage of profit made in the year.
A company has to prepare and file a Self Assessment Corporation Tax Return with HMRC. The company's accounts are also submitted each year to HMRC. It is the responsibility of the owners of the company to ensure that this is calculated and submitted correctly. The best way to do this is by appointing an account who understands how to correctly calculate tax due.
In addition company director's have to file their own personal self assessment tax return by 31 January each year.
The company also has to file its accounts with Companies House. Most company's file abbreviated accounts, which contain less financial information than a full set of accounts. As information filed with Companies House is in the public domain, many companies choose this option as it limits the amount of trading information it's competitors can see.
Each year a limited company has to file a confirmation statement. This is a summary of information about the company such as directors, registered addresses, persons of significant control etc. This is a very simply exercise to undertaken and can be done online. We've written a post which explains how to file your company's confirmation statement. You can find it here.
This may all seem a bit daunting, but don't let that put you off. With the help of a good accountant, such us Zest, and ensuring that you take your responsibilities as a director seriously, you can run your own limited company like thousands of small business owners each year.