Limited company

Limited company

A limited company is a legal structure from which a business can trade. The basic structure is that a person owns the company (known as the shareholder) and a director runs the Company. A director is typically paid a salary to run the company and at the end of the year, if there are profits remaining, the shareholders can be paid a dividend, which represents a return on their investment. In the UK, most limited companies are known as "owner managed businesses", meaning the director and the shareholder are the same. The additional benefit for directors and shareholders is that a company has "limited liability". This effectively means creditors cannot pursue a director or shareholder personally for debts of the company (unless of course there is mischief/fraud). For this reason, a director has significant duties including:

  • keeping company records and reporting changes
  • ensuring the company does not become insolvent (unable to pay debts as they fall due)
  • filling accounts at Companies House and ensuring the company meets its VAT, PAYE and Corporation Tax responsibilities.

How can we help

We are experts in small business accounting

Advise if a limited company set up is best suited for your business
The decision to trade as an incorporated entity should always be driven by commercial factors.

Set-up a tax efficient structure for your business
Start-up funding, losses, profit extraction, capital raising and exit planning are all factors that must be considered.

Manage your director duties including filing accounts, annual returns and company tax returns

Advise on capital raising options
When you have determined why you need finance, you should set out a clear repayment plan. There are several strategies available such as: extending an overdraft facility, long term/short term loans, purchasing capital equipment using leasing, hire or finance purchase terms, sale and leaseback of buildings or even a share issue. Always remember, up-to-date financials will be imperative to obtaining funding. No reputable lender will make funds available unless they understand how the business has performed and the direction of future travel.

Advise on tax efficient restructuring of your business
You may be thinking of buying a competitor, setting up a new business/shop/trade, splitting out your trades in anticipation of a future sale, closing a part of your business or selling one or more business lines.

Advise on tax efficient exit planning
Selling shares is the simplest way to release equity. However, there are several other options available depending on your personal circumstances (for example you may wish to sell your trade but personally retain assets such as commercial buildings to generate a future income stream)

Limited company FAQs

What are the advantages/disadvantages of a limited company

Advantages: the benefit of limited liability, easier access to debt financing, attracting investors, investing excess Company cash to generate additional revenue and lower rates of tax.

Disadvantages: Increased levels of tax and regulatory compliance, higher accountancy fees and disclosing your financials on the public domain.

What are director responsibilities?

Maintaining financial records, preparing financial statements according to Companies house disclosure rules, preparing and submitting corporation tax returns and keeping Companies house updated with the latest changes. The good news is a director can appoint a professional firm of accountants to manage their duties. The buck ultimately stops with the director which is why it is imperative to appoint an accountancy firm that is regulated by a recognised accountancy body such as the Association of Chartered Certified accountants (ACCA).

Filing company accounts

A limited company is governed by the companies house act 2006 and must deliver financial statements and an annual return to Companies House. In addition to late filing penalties, failure to meet these duties could result in a director being banned (disqualified) from being a company director in the future.

Dividends

An interim or final dividend is paid if there are sufficient distributable reserves. Distributable reserves are built up over time and represent profits after the payment of corporation tax. It is illegal to make a dividend payment without sufficient reserves. For this reason, you should prepare financial statements before declaring a dividend to ensure a director does not fall foul of the rules.

Tax on dividends

The following rates of tax apply to dividend income (assuming you lose your personal allowances)

  • 0% - on the first £2,000
  • 7.5% - on the next £35,500
  • 32.5% - between £37,500 - £150,000
  • 38.1% - any amounts above £150,001

What is the best way to extract cash from a company?

See our salary vs dividends blog

Transfer of shares

Administratively, this is a simple process. However, there several considerations. Firstly, you may need to get the company valued (it is inherently difficult to get a small/medium business valued). Secondly, there are the tax implications depending on the recipient. For example, if you transfer shares to an employee, this could be taxed as earnings (which broadly speaking means PAYE tax applies). Transferring shares to your family is considered a capital disposal and the shares are valued at their market rate creating a tax charge, irrespective of you receiving any cash. In this instance, tax relief is available depending on your personal circumstances.

Will my company qualify for EIS and/or SEIS

It depends. If your business has a qualifying trade and meets the SEIS criteria and/or EIS criteria HMRC will approve your application. It is important to note ongoing compliance is imperative because if you fall foul of the rules, HMRC can withdraw the approval leaving both you and your investors in muddy waters.

It is also important to understand, it is the company raising capital (be issuing new shares) and you, as the existing shareholder, are not releasing equity by selling your shares.

How to close a limited company

The simplest way to close a company is to:

  • pick a date to cease trading/close the doors
  • recover cash from your debtors (your trade debtors, recover deposits, loans made staff etc)
  • pay off all your creditors (your suppliers, banks/lenders and all HMRC tax liabilities)
  • pay a final dividend to the shareholders
  • notify companies house and submit an application to strike off the company.

The strike off process takes around 3 months and once the company has been struck off you will resigned as director and no longer have any duties. As always, it depends on your personal circumstances but there may be alternative routes available.