Before you start your business you need to decide whether you will be a Sole Trader or a Limited Company. Or you may choose to be a Partnership rather than a Limited Company if there are two or more business owners. It can be confusing and many business owners opt for Limited Company status without really understanding what is involved.
So what does being a Limited Company involve?
Once you set up a Limited Company you will become a Director of the company and with that title you have significant responsibilities. If you don't meet these responsibilities you may be fined, prosecuted or disqualified from being a director of any company for a period of time.
Directors are responsible for:
1. the company adhering to the company's Articles of Association which will have been drawn up when the company was set up;
2. keeping records about the company and informing HMRC and Companies House of any changes;
3. filing the company's statutory accounts and the Corporation Tax return by the due date;
4. paying any Corporation Tax due.
In addition each director must register for Self Assessment and submit a personal tax return each year. This will report the pay and dividends drawn from the company during the year and will calculate any personal tax payable on that income.
Keeping Accounts Records
Your accounts records must be kept for 6 years after your year end. The records must include paperwork supporting all monies received and spent by the company as well as any other relevant or supporting information such as bank statements, loan statements, agreements, etc. Your records must include details of the assets owned, debts owed and stock valuation calculations. You can be fined or disqualified as a Director if you do not keep suitable accounting records.
Statutory Accounts will need to be submitted to Companies House by the deadline of 9 months after your financial year end. Statutory accounts will include a profit and loss account, a balance sheet, notes about the accounts and a Director's report and must meet either International Financial Reporting Standards or New UK Generally Accepted Accounting Practice. An accountant will be able to prepare the statutory annual accounts for you from your accounting records.
Statutory accounts are available to the public but a micro- business can submit abridged accounts which will include a balance sheet and notes signed by the Director and therefore less information will be available publicly.
Paying Corporation Tax
Corporation Tax is payable on the profits of the business. The tax due is currently 19% of the profit and must be paid to HMRC by the deadline which is usually 9 months and 1 day after your company year end. Some expenses which are allowed for your company annual accounts are not allowed to be claimed when calculating Corporation Tax. For example client entertaining is not an allowable expense for Corporation Tax purposes. The Corporation Tax return is prepared separately to the annual accounts as the reports will not contain exactly the same information but they can be prepared and submitted at the same time.
Submitting a Confirmation Statement
This statement must be completed each year following incorporation (set up) of the company. The Statement confirms that the details about the company, its directors and its shareholders which are held by Companies House are correct. There is an annual fee of £13 to pay when the Statement is submitted. However you are also expected to notify Companies House of any changes to directors, shareholders, addresses, etc during the year and not wait until the annual Confirmation Statement.
Displaying Company Information
Limited Companies must display their company name at the Registered Office premises unless the business is run from their home. All company documents and promotional material must show:
- The company registration number
- The registered office address
- Where the company is registered (England or Wales)
- That the company is Limited by using the word Limited or Ltd
This is just an outline of what is involved in being a Limited Company. There is a lot more information to be found about running a Limited Company on HMRC website.
Directors also need to understand the best way of taking money out of their business both for them personally and for the business. An accountant can advise on this too but generally a Director will take a salary paid through the payroll and a dividend.
A dividend is payable to the shareholders of a company. As a Director you may be the sole shareholder. Shareholders are allowed to take dividends from the company but must not pay out more than the profit in the current year and any unused profits from previous years. If your company is making a loss a dividend cannot be paid.
Corporation tax must be calculated on the current year profit before the dividend is calculated as Corporation Tax is payable on total profits before dividends. Dividends are usually payable to all shareholders based on their percentage shareholding and personal tax is due on dividends over £5,000. Dividend vouchers must be prepared for each payment and given to each shareholder.
If a Director draws more money than is due based on profit this is considered to be a Director's Loan. There are very specific tax rules about the amount of money "loaned" to a director over £10,000 and it is important that a Director knows that these additional monies may be taxable. It is worth getting advice from an accountant prior to year end so that any excess dividends or loans can be dealt with appropriately before it is too late.
As the Director of a Limited Company, you must ensure you meet your responsibilities. Whilst you might, and probably should, use an accountant, a bookkeeper or a secretarial service to keep control of different areas of your Limited Company responsibilities, you, as the Director, will be the person who is fined, prosecuted or disqualified if these are not met.