Limited Companies:
Everything you should know
If you're a UK-based business and considering - or have just opened - a limited (Ltd) company, then you're on the right page. I'll cover everything you need to know about Ltd companies.
This Page Covers:
The basics of Ltd Companies
Companies House Fundamentals
HMRC and your Company
Taxation and Tax Returns
Accounting and Compliance Guide
Modules:
Limited Company Basics
1.1 What is a limited company?
A limited (Ltd) company is a business structure with its own legal entity, separate from the people who own and run it.
In the UK, a Ltd is easy to open, but can be challenging to run from a legal, accounting, and taxation perspective. Hence, this free guide to opening and trading through an Ltd. I'll teach you everything you need to know to understand your Ltd and how it should operate fully.
1.2 What are the advantages of trading as a limited company?
An Ltd offers many advantages. These include:
Separate legal entity. Because the company is a separate entity from its owners (the shareholders), it is liable for its own debts and legal matters, not the owners, unless the owners have a personal guarantee on any of the company's debts.
This means that the company is liable for any legal action or unpaid debts. The shareholders' personal assets are generally protected.
Taxation. Operating as a Ltd company can save tax, especially if you're a higher-rate taxpayer. More about this later.
Professionalism. Trading as a limited company can look a lot more professional. For businesses that contract work with larger organisations, those organisations often require your business to be limited.
1.3 What should my limited company be called?
It is good practice to name your limited company something appropriate for its trade. However, the following criteria must be met:
The name must be unique. If another active company already exists with the desired name, you can't use it, as Companies House doesn't allow 2 companies to have the same name. You can check for available limited company names here.
No sensitive names. You cannot use any names that imply a connection with government, public, or regulated bodies. This includes names like "bank", "fund", or "university".
No offensive names. Swear words, racism, and misogyny cannot be used.
Trademarks. You cannot use a name that infringes on an existing registered trademark.
1.4 What are shareholders?
Shareholders are the owners of the limited company. Ownership percentage is based on the number of shares each shareholder has.
A limited company must have at least one shareholder. Most Ltd's have one to three shareholders. There is no maximum number of shareholders a limited company can have.
1.5 What are directors?
Directors are the individuals who manage the company. It is common for an individual to be a director and a shareholder, i.e., the owner (shareholder) is also the person who runs the company (director).
1.6 How to open a limited company?
The cheapest way to open a limited company is directly through HMRC. The process is straightforward. The application process is here: https://www.gov.uk/limited-company-formation/register-your-company
An easier method, especially if you want a virtual registered office address, is to use a formation company. I suggest Your Company Formations.
1.7 What is the company registration number?
Once a company is registered, it will have its own unique registration number. This number, along with the company name, directors, and shareholders, will appear on the public register at Companies House.
1.8 What is the company's registered address?
The registered address is the address HMRC and Companies House will use to contact the company. The address is public on the Companies House Register, so many companies choose to have a virtual registered office.
Companies House & HMRC: What you need to know
2.1 Companies House
Companies House incorporates, registers, and dissolves UK limited companies.
When dealing with Companies House, including signing into the company's online Companies House account, you'll need the company's authentication code. Companies House will post this to the company's registered address soon after incorporation. If you've lost the company's authentication code, you can request it here.
As a limited company, you'll need to do the following to stay compliant with Companies House:
Keep the public register up to date. You must keep the company's public records current. This includes the company's name and registered address, directors, shareholders, and SIC codes. A SIC code explains the industry the company trades in. You can update all of this information through the company's online account at Companies House.
File an annual confirmation statement. You must file an annual statement and pay a filing fee once a year. You file this statement through the company's online account at Companies House.
File annual accounts. Accounts must be filed each year. Many Ltd company owners think they can do the accounts and filings themselves. This usually backfires and can lead to large financial penalties due to discrepancies, errors, and late filings. I strongly suggest you use an accountant for limited company accounts. Contact me regarding my limited company accounting services.
Action any correspondence. Action any correspondence from Companies House. This could include, but is not limited to, identification checks, paying fines, and answering questions.
2.2 HMRC
HMRC oversees taxation, including limited companies.
As a limited company, you'll need to do the following to stay compliant with HMRC:
File annual accounts and a corporation tax return. You must file annual accounts and a corporation tax return (CT600) with HMRC. You must also pay any corporation tax to HMRC. Use an experienced, licenced accountant for these filings. This can prevent errors and financial penalties, and reduce the company's tax bill.
I file accounts with Companies House and tax returns with HMRC for my clients, covering both bases. Contact me for a free quote.
Action any correspondence. Action any correspondence from HMRC.
Understanding Limited Companies and Tax
3.1 Does a limited company pay tax?
Yes, a Ltd company pays corporation tax on its profits. This differs from a sole trader, who pays income tax and National Insurance on their profits.
Corporation tax is calculated and declared through a corporation tax return. Any company profits withdrawn by shareholders are classed as dividends. These are declared on a self-assessment tax return, and dividend income tax is paid.
Company owners must understand this "double" taxation. Corporation tax on company profit and dividend income tax on dividends taken from the company. It's easy to not prepare for both, or to forget about one of the returns.
3.2 What is the most tax-efficient way to pay myself as a company director and shareholder?
This varies depending on each individual's income circumstances. Usually, the best way to save both corporation and income tax is to:
Claim all expenses and allowances. This includes allowances for travel, entertainment, working from home, etc.
Pay yourself through PAYE. Having a combination of salary and dividends is often tax efficient.
The best advice I can give is to speak with your accountant. If you don't have one, contact me. I'm a fully licenced, qualified, and experienced UK accountant. I specialise in small UK limited companies.
3.3 Accounting is key
Ensure that accurate accounting and bookkeeping are being done for the business. Combined with a proactive accountant, this is one of the best ways to save tax.
If you need accounting software, here is my exclusive link for 90% off Xero. The software is ideal for small limited companies and companies that will be VAT-registered.
Director's Loan Accounts
4.1 What is a director's loan account?
A director's loan account tracks money owed to the company by its director(s), or money owed to the director by the company.
Business expenses must be wholly and exclusively for the running of the business. The relevant director must pay for any personal items showing in the business accounts. This is why the director's loan account exists.
Conversely, any expenses a director incurs through their personal accounts must be reimbursed to the director. Once again, these items are added to the director's loan account.
4.2 Caution: Overdrawn Director's Loan Account
The company's director(s) mustn't owe the company too much money. This is called an overdrawn director's loan account. An overdrawn account can lead to heavy financial penalties issued by HMRC.
An overdrawn director's loan account is usually caused by the following:
Personal items showing in the business bank accounts. Company expenses must be wholly and exclusively for the running of the business. Any personal items will be added to the director's loan account. To prevent this, please ensure that only business items go through the business accounts.
Taking more dividends than profits. Available profits for withdrawal as dividends are after corporation tax, not before. It is a common rookie error to withdraw all cash from a business as a "dividend", leaving too little for corporation tax and overdrawing available dividends. Please ensure there is always enough float in the company bank account to cover the corporation tax charge. This will prevent this from happening.
Additional Items
5.1 Bank Accounts
Because the company is its own legal entity, all accounts must be in the limited company's name, not the shareholders' or directors' name(s). This is crucial for bank accounts, loan and mortgage accounts, credit cards, and savings accounts.
Try to open a bank account that will integrate with your accounting software. Any major high street or online bank should do this. It will make bookkeeping and accounting much easier.
5.2 Accounting Software
Ltd company accounts don't have to be kept using double-entry bookkeeping. However, for any serious business, using Excel or paper accounts isn't adequate. Please consider accounting software. Sage, QuickBooks, and Xero are the big three. FreeAgent and KashFlow are alternatives. My personal recommendation is Xero. Here is my link again for 90% off. An amazing deal!
5.3 VAT Registration
If the company will be VAT-registered, having accounting software is a must, as VAT returns are filed through it. You cannot file them directly with HMRC, even if you have an online HMRC account.
A company can register for VAT at any time. However, it must register for VAT if its taxable turnover will exceed £90,000 over a rolling 12-month period.
You can register your Ltd for VAT here: https://www.gov.uk/register-for-vat
Questions? Let me know.
5.4 Using an Accountant
Please, please, please use an accountant. Also, ensure they're fully licenced and qualified. I've experienced too many horror stories not to mention this.
You don't have to use my services, but please ensure you have a competent, proactive accountant.