WHAT IS A LIMITED COMPANY?
A Limited Company is an organisation that you set up as a business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays its debts and other liabilities the company can then share its profits.If the business runs into financial difficulties and
owes money, no individuals within the business will have to pay off any debts.
HOW DO YOU START A LIMITED COMPANY?
Firstly, think of a name for the company. The name you choose may not be available so try and come up with three different names.
WHAT DOES A LIMITED COMPANY NEED TO DO TO START UP?
Register the chosen name with Companies House. The company must have at least one Director and one shareholder, this can be the same person.
WHO CAN BE A DIRECTOR?
Anyone, Male or Female who has a National Insurance Number and that is not currently subject to any bankruptcy or disqualification restrictions.
WHO CAN BE A SHAREHOLDER?
Anyone really, they don’t have to be associated with the company or need to live in the UK. Quite often you have a scenario of a Husband/Wife owned Limited Company where both the Husband/Wife are shareholders.
HOW DO SHARES WORK?
Typically, a small Limited Company would be set up with say three shares each worth £1 each. If those three shares are owned equally by three shareholders (e.g. Husband, Wife and Son) then effectively each shareholder owns a third of the company and is entitled to be paid in dividends up to a third of the company’s profits through dividend payments.
WHAT ARE DIVIDENDS?
Dividends are payments made to shareholders from the company’s profits. The company sells its goods or services under the company name. It will also have expenses that it pays for in the company name. The profit is the sales less the expenses, less any liabilities the company has.
WHAT TAX DOES A LIMITED COMPANY HAVE TO PAY?
It pays a tax called Corporation Tax @ 20% of its profit.
SALES OF GOODS OR SERVICES = £40,000
Travel & Accommodation
PROFIT = £15,000 (£40,000 – £25,000)
TAX TO PAY = £3,000 (Corporation Tax is 20% of the profit amount)
We normally set up and structure smaller Limited Companies in such a way that they are very tax efficient and flexible.
The following example is a very common scenario based on a Husband and Wife (any two persons, they don’t have to be married, any sex) who wish to start a small Limited Company and whereby they need £2,000 per month take home pay between them whilst the business is starting up and growing.
The Director and his Wife/Husband are both employed by the company.
They are each paid £672 per month as a wage = £1,344.
They each then get another payment from the company called a dividend payment, £328 per month = £656.
The above makes up their £2,000 per month required.
The payments are made from the company bank account by standing order each month, paid directly into their personal bank accounts.
To all intents and purposes, the Husband and Wife should see this as no different to being employed in a standard way.
The amount of tax and National insurance payable of any kind on the above is ZERO! This is a very tax efficient way of operating a small limited company.
ADDITIONAL BENEFITS OF A LIMITED COMPANY
Higher take home pay than umbrella companies
Company seen as more credible and trustworthy
Claim a wider range of expenses
Flexible tax planning
Can apply and benefit from VAT Flat Rate Scheme
Personal assets protected
The above notes assume individuals tax status and other financial circumstances and should only be used for guidance. There are circumstances where some or all of the above may not be applicable, therefore we recommend that you seek further assistance prior to forming a Limited Company.
Andrew Makin, November 2016