There are about 5.7m SMEs in the UK, according to government figures. Although most (3.4m) are sole trader businesses (AKA people who are self-employed) and 405,000 are ordinary partnerships, there are 1.9m private limited companies, about a third of the UK’s total business population.
When they start a business, for various reasons, many people choose to set up a private limited company (which is called “incorporation”).
A key reason is to mitigate personal financial risk. If you’re a sole trader and your business fails, you’re personally liable for its debts. Providing you do not trade recklessly or fraudulently, this isn’t normally the case if you’re the managing director of a private limited company, because the private limited company is a separate legal entity.
If you’re considering setting up a private limited company, here are a few basic rules to ensure you get into good habits right from the start.
1 Open a company bank account as soon as possible
The limited company must have its own separate bank account, because it is a separate legal entity. Open a business bank account as soon as you register the limited company with Companies House (the government agency that incorporates and dissolves limited companies).
Don’t mix them. Your bookkeeping will be quicker and easier if you only put company transactions through your business account. In fact, paying for private purchases out of the company bank account can create serious tax problems, so it should be avoided.
And don’t pay for non-business purchases out of the company account just because the money’s there and it’s convenient. Use your own money or debit/credit card.
If you pay company expenses personally you are, of course, entitled to reclaim them back from the business. But try to avoid this as much as possible; get a debit card for the business account.
Where using your own money to buy things for the company is unavoidable, take the same approach as if you were claiming expenses from an employer. Detail the claim, either electronically or by writing it down; retain/attach receipts (and the mileage log if relevant); and store safely.
Do the above regularly, so you don’t forget any costs or lose receipts, which may mean you can’t claim a legitimate expense against the business’s Corporation Tax bill.
If you’re using a credit card for business expenses, use it exclusively for the business – don’t put private purchases on it. Also make sure that the card is paid off in full at the end of every month.
You’ll need to analyse the amounts spent on the credit card across the business expense items (see below), because credit card transactions will often fall into different categories. Reclaim costs in the same way as for expenses paid personally (see 3).
This often causes confusion, but you can simply look at it as your private expenditure and make an expense claim for the business part. You’ll need to have a sensible way of establishing how much the “business part” is.