Are you ready to be a director?
Setting up a limited company is very cheap to do and has become an easy option for many to adopt when starting their own business.
Being a director brings with it certain duties and responsibilities. Are you ready for that? Let’s explore what you need to know.
All too often the perceived importance of owning a limited company sees business owners jump right into the formation of this separate legal entity. The title of director has a certain gravitas but is a limited company the right choice for your circumstances?
Deciding on a business structure is one of the most frequently asked questions by any new start up.
There are several types of business set up, the main two types being:
- Limited Company
- Sole Trader (partnership if more than one person)
What does the structure mean?
Operating as a limited liability company means that your personal assets are protected if the business fails, unless of course you have given personal guarantees against any debts. The debts are limited to the company and not you as a shareholder.
With a sole trader business you are personally responsible for the debts of the business and your other assets, e.g. your house, could be used to settle the debts of the business.
Regulation and legislation
Regulation, legislation and control surrounding limited company status, e.g. Companies Acts, filing accounts, registering the company etc, are far more onerous than that of a sole trader business.
A sole trader is easier to operate with less formality.
In almost all circumstances the regulation and legislation surrounding a limited company means that an accountant is required to complete the statutory accounts and corporation tax returns. Many operating as a sole trader can complete their tax returns themselves as they are much more straight forward.
It’s vital to make sure that you have enough funds available for the services of a reputable accountant to ensure that your regulatory responsibilities are met; see below.
At profits in excess of circa £30,000 there can be tax savings associated with operating as a limited company.
Profits from the limited company can be taken in the form of dividends with the benefit being that no national insurance is due on the dividends.
For a sole trader income tax and Class 2 and 4 national insurance will be due on the profits.
It’s always worth carrying out some projections to ensure that you’re aware of the taxes that you would pay whether operating as a sole trader or a limited company.
Importantly, the projections should be refreshed on a regular basis and at least annually as things can change.
As you establish your business you might be working elsewhere to keep income coming in whilst it builds and gets off the ground.
There may be costs incurred during the setup of the business that mean a loss is made in the first year(s).
Take this as an example.
Mrs D is setting up a business but will still be working whilst the business gets off the ground.
She needs to spent money on setting up a web site, stock, stationery etc and expects that she will make a loss in the first year of trading and move into profitability in the second year.
In this situation it may be worth starting the business as a sole trader as losses from the sole trader business can be offset against her income from her job.
So she may get a tax refund!
Worth thinking about.
Accounts and Reporting Requirements
For a sole trader the accounts and reporting requirements are very straight forward.
All that is needed is a set of accounts and a self assessment self employment supplement (known as an SA103) each year.
As a limited company you will have a number of filing duties. Missing a filing deadline can result in heavy fines and penalties.
For a limited company the filing duties are:
- Annual Statutory Accounts in a certain defined format
- Annual Confirmation Statement
- CT 600 corporation tax return
- Self assessment for directors
- PAYE for directors including RTI returns
- Making Tax Digital VAT returns where applicable
With regulations often changing having the paid help of an accountant is essential to make sure that you do not fall foul of any laws or rules.
Limited Company or not?
Only you can decide which structure will suit your circumstances best.
However this may be something you would like to discuss with your accountant or business advisor at the start.
Make sure that you know what you are getting yourself into so that there are not any great surprises later.