Setting up a Limited Company

A limited company is a separate legal entity from its members. The business is actually owned by the limited company, not you. This has its advantages and its drawbacks. As the name suggests, the liability of the company is limited. If there were a failure, therefore, you and your personal assets would be protected. This is in contrast to the position where you are a sole trader or in partnership. In those cases, you have unlimited liability.

Who Owns the Company?

The ownership of a commercial company is determined by the ownership of the shares in the company. It is possible to have just one shareholder, but this is not recommended. Shareholdings in a company are a good way to pass on ownership of the business gradually, say, to the next generation of your family. There can be different classes of shares, giving different rights. So you could, for example, give non-voting shares to someone who wishes to put some money into the company, but who does not wish to have any part of the management of the business.

The ownership of a company is separate from the management of the company. A company must have at least one director and one secretary. Again, it is recommended that there are at least two directors. However, the directors do not have to be shareholders of the company.

Becoming a Director

If you run your business in the format of a limited company, technically you become employed again. You receive a salary as director, and this makes your category employed rather than self-employed. However, this is a technicality, which respects the legal fiction of a company being a separate legal entity from its owners. In all other respects, you are working for yourself. What this means, however, is that you have to pay tax under PAYE, and you have to pay class 1 National Insurance. Some of the class 1 National Insurance is deducted from your salary, and some is borne by the company as the employer's share. Having said this, the class 1 contributions do entitle you to an earnings related supplement to your retirement pension.

You can also pay yourself dividends on the shares which you hold. The dividends must be paid to all holders of the same class of shares. Dividends are subject to a tax credit of 10%, and if you do not pay higher rates of tax, there is no further tax to pay on dividends. However, you may not reclaim the tax credit as a repayment to you.

Company Taxation

The company pays corporation tax on any profits (after paying you the director's salary). The rate of corporation tax goes from 0% to 32.75%, depending on the amount of profit made. This is lower than the personal rates of income tax. It may, therefore, be advantageous to pay corporation tax if the level of profit is right, and if you need to keep the profits inside the company (for example, for reinvestment in assets). If you want to take the money out of the company, the best method is usually a mixture of director's salary and dividends.

Company Law

A company is governed by company law, mainly as contained in The Companies Act 1985. There are strict time limits (with penalties for failure) for filing documents, including the company accounts, at Companies House, and members of the public can search the records and the accounts of any company. Directors are subject to regulations, and can be fined or even found guilty of a criminal offence for failure to comply.