Working through a limited company can be a good option for many contractors and freelancers.
But before setting one up it is important to research the potential benefits and implications of having one, to ensure it is the right option for you. This guide has been put together to help you learn everything you need to know about starting a limited company.
What is a limited company?
A limited company is an organisation that can be set up to run a business. These companies have their own legal identity and are responsible in their own right. As a result, a limited company is treated the same as a person and can make money, lose money, acquire debt and pay tax just like a person.
Why set up a limited company?
As long as you trade honestly and within the law, as a director your risk of loss is limited to the money that is invested in the company. This ensures your personal finances are protected. However, if you provide personal guarantees for the limited company, you will then become liable if anything was to go wrong.
Setting up your limited company
There are two types of limited company to choose from, Private Limited Companies (LTDs) and Public Limited Companies (PLCs). Private Limited Companies are the most common set up for small businesses in the UK, whereas Public Limited Companies tend to be large, established businesses.
When you are ready to move forward the first thing you need to do is register in the official list of companies, kept by Companies House. In order to do this you should have decided on the company’s name and registered address, the names and addresses of directors, and details of shareholders and share capital.
If you have made decisions about all of the above, you are then ready to visit the Companies House website. It usually takes 24 hours and costs £15. Companies House will be able to check whether the name you have chosen is suitable and is not already used. The setup process will walk you through a number of online forms that you will need to complete.
Memorandum of Association
Next, you will need to file a Memorandum of Association. This is a legal document where shareholders and guarantors state their intention to form a company and become a part of it. When it is submitted it cannot be altered, and it becomes a public document that may be viewed by anyone. A copy of the memorandum of association must be kept at the registered address.
Articles of Association
This document is multiple pages and details information about the business while setting out the rules for the running and regulation of the company. There are model articles available, although it is possible to produce your own. This document will also be displayed to the public but can be changed at any time if 75% of members agree. If this is the case, an up-to-date copy of the articles must be provided to Companies House within 15 days.
Assistance from a professional
If you do not feel comfortable setting up a limited company by yourself, there is professional help out there. A company formation specialist will be able to talk through your options and suggest different structures. As always, this advice would incur a fee but would offer you more protection if things were to go wrong.
The other option you have is to hire an accountant. This is likely to be pricier than the specialist mentioned above; however you will get slightly more for your money. An accountant will be able to set up the limited company, complete VAT registration, sort out the company bank account, in addition to checking tax liabilities. With an ongoing monthly fee, they are then able to continue handling payroll, tax and bills, as well as providing advice.
Setting up the company bank account
A limited company will also have its own bank account set up. As it is a separate legal entity from its directors and shareholders, finances need to be separated from personal accounts to ensure the company money is traceable throughout all stages.
The bad news is that opening a business bank account is not as easy as it sounds. Banks tend to act suspicious towards new companies and prefer lending to individuals with a strong credit rating. It might be worth approaching a bank that you already have an account with, this way they are able to see your financial habits and will know you are a good risk.