Many small business owners set up and operate through a limited company but are often unsure of what exactly is involved in running their company.
What is a limited company?
A limited company is an organisation which has been set up to run a business. The people who own shares in the company are known as shareholders (or members) and the company’s directors are responsible for running the company. A limited company is a distinct and separate legal entity from its owners and is responsible in its own right for everything it does.
Shares
Most limited companies are “limited by shares” which means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but have not as yet paid for. As long as they have not broken the law, company directors are not personally responsible for debts the business cannot pay.
A company has authorised share capital and issued share capital. The former is the maximum number of shares the company may issue; the latter being the shares actually in circulation. The most common shares issued by a limited company are “ordinary shares” although there may well also be “preference shares”.
An ordinary share gives its owner the right to share in the profits of the company by way of dividend and to vote at general meetings of the company. A preference share has fixed dividends but ranks higher than ordinary shares if a company goes into liquidation. A company may issue different classes of ordinary and preference shares with different rights attaching to them.
Corporation tax
On incorporation a limited company is required to register for corporation tax. Corporation tax is charged (currently at 20%) on the taxable profits of a company and is payable within 9 months and 1 day after the company’s accounting year end (although companies with large profits are required to pay corporation tax by instalments). A company’s taxable profits are the value of its sales (or turnover) less all allowable expenses (generally being those expenses incurred wholly and necessarily for business purposes).
Any profit a company makes is, after payment of corporation tax, owned by the company.
Taking money out of a company
Commonly, small incorporated businesses are owned by one or two shareholders, often family members, who are also directors and they will have significant control over the company’s finances and remuneration strategy.
They will extract money from their company through a combination of salary, dividends and loans. Their particular circumstances will determine the best combination and consideration should be given to minimising and delaying both corporate and personal taxes. A limited company is not though required to distribute any or all of its profits.
Salary, expenses and benefits
Where a company wishes to employ staff, even if this is just its sole director, then it is required to register as an employer with HMRC prior to its initial payday and make PAYE submissions monthly through the RTI (real time information) system. The company must deduct income tax and national insurance contributions (NI) from any salary payments and pay these to HMRC along with employer’s NI as appropriate. Similarly, if an employee makes personal use of something that belongs to the company it must be reported as a benefit and pay any income tax due.
Both salaries and employer’s NI are deductible business expenses and, being taken from pre tax profits, will reduce the level of corporation tax payable.
Dividends
Dividends are post corporation tax distributions of profit which are paid to shareholders in relation to their particular shareholdings. They attract no NI and also typically attract income tax at a lower rate than salaries.
In order to pay out dividends:
- A meeting of the directors is held declaring the dividend. Minutes of the meeting must be kept.
- Dividend vouchers must be drawn up showing the date, company name, the names of the shareholders being paid a dividend and the amount of the dividend. Copies of the voucher must be given to recipients of the dividend and copies kept for the company’s records.
Directors’ loans
A company is required to keep records of any loans or advances made to or from its directors. Directors are ordinarily advised not to owe sums to their companies at a company’s accounting year end as this can have tax consequences.
Director duties
Limited company directors have a range of general duties to the company under the Companies Act 2006 (CA). The company too has a number of legal duties including maintaining full and accurate accounting records and complying with tax and employment laws. As the company acts through the board of directors, the directors are responsible for ensuring compliance by the company.
Filing responsibilities
A limited company is required to:
- File statutory accounts which comply with the CA with Companies House within 9 months of the accounting year end. Small companies have reduced disclosure requirements and may file abbreviated accounts which are not required to show a profit and loss account.
- File a confirmation statement (previously an annual return) with Companies House confirming information about a company’s shareholders and directors, secretary (if one has been appointed), registered office address, share capital and anyone having significant control over the company.
- File a corporation tax return and computation along with a copy of the full statutory accounts with HMRC within 12 months of the year end.
Additionally, where a company is registered for VAT, it must file VAT returns quarterly within one calendar month and 7 days of the VAT quarter end. VAT registration can be voluntary but is more normally required when the VAT taxable turnover exceeds the registration threshold (currently £83,000) on a rolling 12 month basis.
Seems like a lot of bother
There is without doubt a fair amount of administration involved with a limited company. But similarly, there can also be some significant tax advantages in comparison with operating as a sole trader as well as the benefit of limited liability.
Should you need the support of a specialist accounting firm, or have any questions regarding your or your company’s affairs, then please contact us for a free, confidential discussion.
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