If you’re looking to start a business you might be considering setting up a limited company.
We get lots of enquiries from people who want to understand how Limited Companies work and whether it’s the right option for them. To answer all of these questions we’ve put together this comprehensive Limited Company FAQ where we cover:
Types of Limited Company
Structure and transactions
Limited companies and Tax
What is a limited company?
A limited company is an “incorporated” business structure which means there is a process of registration by which a separate legally recognised corporate structure (from the person or people starting the company) is formed.
A Limited company is identified by the word “Limited” or abbreviation “Ltd” at the end of the company name.
What does limited company mean?
In other countries Limited or Ltd companies are referred to as “LLC’s” which is an acronym standing for “Limited liability company” which is a more accurate description of what it means to be a limited company.
Limited liability means that in the event that the business is unable to meet it’s financial obligations (ie it’s “gone broke”), that the “liability” for the unpaid debts is limited the people founding the business who are:
The shareholders in a company limited by shares; or
The members in a company limited by guarantee;
In a company limited by shares the liability is capped to the value of the shares the shareholder has agreed to buy when the company is set up. Typically this could be one share of £1. In a company limited by guarantee the liability of the member is the value of the guarantee they have given, usually a nominal amount like £10.
How is a limited company is formed?
In the UK a company is formed by making an application for registration to the “Registrar of Companies” at Companies House which is the UK’s Government body responsible for the administration of Companies.
How do you register a limited company?
Registrations can be made either via an approved user of Companies House electronic filing system, (a company formation agent) or directly with Companies House.
WARNING: Companies House online registration system is awful.
When should I start a limited company?
We get asked this a lot as there is a perception that there might be a more advantageous time of year to register a company.
There isn’t a “best time” to start a limited company. A company has it’s own “tax year” which starts from the date that it is registered and is different from the “official” tax year which runs from the 6th April - 5th April each year.
A company can shorten or extend it’s tax year if required, for instance to align with other companies an individual might run, to align with the April tax year or the perhaps calendar year ending 31st December. It’s really flexible so not something most people need to worry about.
The only exception to this would be where a company is being set up for a specific tax purpose where timing might be a consideration. However this is only likely to happen if you are already being advised by an accountant or tax advisor who will tell you when to set up limited a company.
What is a company limited by guarantee?
A company limited by guarantee is set up with “members” rather than shareholders. The members “guarantee” a nominal sum (say £10) in the event the company cannot meet it’s financial obligations. The “limited of the member’s liability” is therefore the amount of their “guarantee”.
Why would you use a company limited by guarantee?
Companies limited by guarantee are popularly adopted for Clubs, Associations and Charities where it is not intended that profits are to be distributed to the owners but are retained by the club, or used to further the “objects” of a charitable company.
Who owns a company limited by guarantee?
The members are ultimately the “owners” of the company and would be entitled to any surplus assets in the event that the company was wound up, dissolved or liquidated.
Bear in mind that only the members returned on the company’s confirmation statement and therefore members in the “legal” sense of the word will be eligible for “ownership” status.
The “articles” of a club will usually make a distinction between these members and individuals paying for “membership” of the club who may be restricted from participation in the administration of the club company entirely, for instance by having no voting rights at meetings.
Any surplus in a charitable company must be distributed to the “beneficiaries” of the Charity or donated to another charitable organisation that carries out similar work.
What is a public limited company?
A “PLC” is a company limited by shares but has a minimum “capital” requirement to be registered. The initial shareholders must agree to subscribe (subscribe means “to buy”) shares worth £50,000. 20% of this must be paid to the company before it can trade (£12,500).
We do not offer a PLC product. DO NOT try to register a PLC yourself ever. If a PLC is right for you, your accountant or solicitor (probably both) will be taking care of everything for you. If you do not have these people advising you a PLC is not for you.
Can you have a limited company without directors?
No. You need at least one director to register a company in the first place.
If a sole director is removed (by the shareholders) or leaves the company or dies in office, the shareholders must appoint a new director. If a director is not appointed Companies House have the power to remove the company from the register of companies. This is known as being “struck off” the register.
Can you have a limited company with one director?
Yes, but this must be a “real” person and not another company acting as a “corporate” director.
How do you close a limited company?
An application can made to have a limited company removed from the register of companies. This process is known as an application to have the company “struck off” the register. Once Companies House have received the application a record is placed on the register and the application is “advertised” for 2 months in case any creditors (people the company owes money to) wish to object to the company being removed.
When should you close a limited company?
If you no longer need to use your company you should first ensure that any filing requirements have been complied with and any taxes due have been paid. Once the company’s affairs are in order you can begin the process to have the company “struck off” the register.
Can a limited company buy/invest in shares?
Can a limited company buy property?
Yes. This is a situation where you should take some advice. It can be practical (and tax efficient) to buy high value assets like property in a separate limited company, even if you intend to occupy the premises yourself (though another limited company).
These type of arrangements are known in accounting and legal circles as "op co/prop co", where one company owns the property and another operates from the premises.
Can a limited company buy a house?
Yes. However, limited companies cannot be used to get around the second home stamp duty surcharge.
Any residential property purchased through a limited company has to pay the stamp duty surcharge of 3%, even if it is the first property purchased through the company.
Can a limited company buy a car?
Yes. You should be aware that there are usually tax implications for company car drivers.
Are limited company bank accounts protected?
Yes. Bank accounts held in the name of a limited company are covered by the Financial Services Compensation Scheme and provides cover up to £85,000 per bank.
As a company is recognised as a separate legal entity to the owners (Directors/shareholders) the protection is separate to the amount that these individuals might hold in accounts with the same bank.
Can I run a limited company without an accountant?
Technically yes. Practically no.
The best time to talk to an accountant about running a business through a limited company is BEFORE you set up a company. They will guide you on setting up the company correctly according to your circumstances.
Can I run a limited company without bank account?
No. You must open a bank account in the name of your limited company. You cannot/should not use a personal bank account for your limited company.
Can I run a limited company without shareholders?
No. A company must always have at least one shareholder.
Can I run a limited company without registering for PAYE?
You do not have to run a PAYE account to take money out of a company although it often the most tax efficient way to withdraw profits from your business.
Can I run a limited company with two trades?
Yes this is perfectly acceptable. Depending on turnover/profitability you may wish to use two limited companies. This way in the event of insolvency of one trading activity the other company can continue unaffected. Alternatively, this also provides the opportunity to sell one business at a later date much more easily than extracting that trade from a single company.
Can I run a limited company with no employees?
Yes. There is no obligation to run a PAYE scheme or employ anybody through a limited company.
How long do I need to keep records for a Limited Company?
You should keep all financial records such as invoices, receipts and bank statements for 6 years. This applies even if the company has been dissolved.
Does a limited company do a tax return?
Yes. Company’s have their own self assessment tax regime and must file a CT600 corporation tax return annually.
How does limited company tax work?
Limited companies have their own tax regime and different tax rates to individuals.
The main tax on a company’s profits is Corporation Tax. A company must file a CT600 corporation tax return each year which is a self assessment tax return for companies.
Just like an individual’s tax return the CT600 will detail all the company’s income. Commonly this will be derived from the company’s trading profits but can include other taxes such Capital gains tax in the same way that this is reported on an individual SA100 tax return.
There are a lot of reliefs and allowances that businesses may be eligible for adding another layer of complexity that makes filing your limited company tax return a job for an accountant.
When is a limited company dormant?
A company may be defined as a dormant company when it has recorded “no significant accounting transactions during the accounting period”.
A ‘significant’ accounting transaction is defined as one that the company should enter in its accounting records.
The company’s confirmation statement is used to change the SIC code to 99999 – Dormant Company which will change the record for your company on the “Register of Companies”.
Can a limited company buy premium bonds?
This question is more common than you might think! Used up your premium bond allowance? Why not buy more through a limited company. Sorry. Nice idea but it’s not allowed.
Premium bonds can only be purchased by individuals (they cannot be jointly owned). This is because the government really doesn’t want to get into any difficult “ownership” issues around premium bonds. The bond holder is the owner. Corporate ownership is specifically prohibited on these grounds.
Can limited company losses be carried forward?
Yes. This is one of the advantages of a limited company. It is not uncommon for a company to record a loss particularly in it’s 1st year of trading.
This loss is carried forward and offset against future years profits before any corporation tax liability is calculated.
Are limited company owners self-employed?
The owners of a company are it’s shareholders. In smaller companies the shareholders are usually also the directors of the company.
Being a director of a limited company does not make the director self-employed. However, all company directors are required to complete self-assessment tax returns. Commonly the director(s) of a limited company will take both a salary (paid through the PAYE system) which would give them “employed status” and also collect a share of the profits of the business via dividends (dividends are paid to the shareholders).
Are limited company dividends taxable?
Yes. Company shareholders should report the income they receive from limited companies on their tax return (SA100).
How do you pay yourself with a Limited Company?
There a three ways to take money/profits out of a limited company.
- By running a payroll scheme (PAYE) and taking a salary;
- By declaring dividends and distributing these to the shareholder(s);
- By taking out short term loans, known as “director’s loans” – Directors loans MUST be repaid under strict rules to avoid paying unfavourable rates of tax.
Does a limited company have to pay minimum salary to the directors?
No. Although it often pointed out that a director paying themself £8,788 per annum salary and working a 40 hour week is earning below minimum wage.
a) Pay yourself minimum wage and pay more tax and national insurance; or
b) Don't report yourself.