What To Expect When Becoming a Limited Company

What To Expect When Becoming a Limited Company

What To Expect When Becoming a Limited Company

17 September, 2021

The thought of becoming a limited company may seem daunting and present you with challenges you’re unfamiliar with, but it offers you and your business the opportunity to reach heights that may have been unobtainable before.

What to expect when becoming a Limited Company

Making that shift to a limited company is a big step for any business owner or sole trader, but comes with rewards, and allows you and your business to flourish.

Why set up a limited company?

Setting up a limited company protects you by distinguishing you and your business as two separate entities, while still allowing you to retain full control. That means that should your business run into difficulties, the business - not you - will be responsible for any debts. That peace of mind alone is by far the greatest reason to consider the switch from sole trader to a limited company.

You’re free to appoint additional shareholders, which can be family, who will have limited liability.

Tax rates for limited companies tend to be more favourable, and if you employ staff, paying them via Pay As You Earn (PAYE) is easier.

For a majority of the day-to-day operations of the business, when you make the change you’ll see no impact, and it will be business as usual. However, the tax benefits and the ability to separate yourself from the business are two of the biggest benefits.

The advantages of becoming a limited company

  • You and your business become separate, meaning you remain in control while not being financially accountable should the business come into difficulty
  • You can claim additional business expenses, such as training, accountancy fees, travel costs etc
  • As you and the business are separate, there are fewer complications when it comes to selling the business
  • A limited company can have greater credibility than a sole trader
  • Corporation tax on your profits is lower than the income tax paid by a sole trader

The disadvantages

  • The initial cost of setup may not be something you previously factored into your business plan
  • The paperwork and reporting requirements can be complicated
  • Your business’s financial records will be made public
  • Accountancy costs can be expensive

How to become a limited company?

There are two main steps involved in becoming a limited company:

1. Register the business with Companies House at https://www.gov.uk/limited-company-formation - this step itself has a number of stages that are simple and easy to follow, however, it can take several hours.

2. Let HMRC know - this may be something your accountant (if you have one) will be able to do on your behalf.

Do the disadvantages outweigh the advantages of remaining a sole trader?

Yes, absolutely, so long as you earn over the £12,500 tax allowance. Nobody likes administrative tasks, but it’s a small price to pay to allow your business to operate without the risk of losing your assets in the event the business experiences financial difficulties.

The tax benefits and ability to pay employees via PAYE also make your life easier and allow you to get on with running your business.

As a sole trader, it can be difficult to raise capital in order to grow the business. Some companies are also known not to deal with sole traders.

Sole traders are also not eligible for statutory maternity leave, holiday, or sick leave.

Things to consider before becoming a limited company

Before making the decision to become a limited company, there are a number of factors you should consider:

  • There are additional costs involved, as well as forms to fill in which can take time. At Hoxton Mix, we offer company formation for just £10
  • The name of your company must be unique to you, and not contain any sensitive words
  • You need a registered address where post can be sent. Some businesses use their home address, however, for added professionalism, Hoxton Mix can provide you with a business address and sort and scan your post for you
  • How will you structure your shares? Will you be the sole owner, or will there be other shareholders, such as a family member? Your accountant will be able to advise you on the best approach for your business
  • All registered companies need a set of Articles, which dictate all aspects of the company and how it’s run. It is possible to use ‘model articles’, which is a generic document, and something that can be applied to a majority of cases
  • Decide on up to four SIC codes that best describe what service your business provides. A full list of SIC codes is available on the government website

What happens once you’ve set up a limited company?

Once you’ve made the decision and taken the steps to register your company, what else do you need to do during those first few days, weeks, and months?

Set up a business bank account

You’ll need to keep your personal finances and your business’s finances separate, so set up a business bank account as soon as possible. Don’t just settle for the same bank as the one you already hold your personal account with, shop around to make sure you’re getting the best service for your needs. 

To set this up it’s likely you’ll need a form of ID and your certificate of incorporation.

Get business insurance

Business insurance is a must, to cover you in the event of something unexpected happening, such as loss or damage. Depending on the type of business you run, there are different levels of cover you will need, which can include:

  • Buildings and contents insurance
  • Public liability insurance
  • Product liability insurance 
  • Income protection insurance
  • Employers liability insurance 

You should thoroughly understand which sort of insurance your business needs to avoid unnecessary costs and headaches down the line.

Set up a website

Getting your name out there is an important step to finding new customers and growing your business. The first thing people do when considering making a purchase or hire is search for a website - and a professional-looking site with strong testimonials will go a long way to cementing your business as one that is trustworthy.

Tell the taxman

There will be administrative tasks that need to be completed in the short term, such as registering for corporation tax within the first three months, and alerting HMRC if you pay any employees. 

HMRC will automatically issue your business with a UTR (Unique Taxpayer Reference), which is used to identify your business for tax purposes. If your company expects a turnover of more than £85,000 in thirty days you will also need to register for VAT.

Keep thorough records

Don’t throw away any correspondence you receive from Companies House and HMRC. If you’re unsure about whether or not to hold onto something, double-check. 

Make sure you keep up-to-date financial records, ensuring you don’t miss or skip anything. As the director of a limited company, it’s your responsibility that all records are correct, so you pay the right amount of corporation tax. 

Put down everything you do in writing. That includes any terms and conditions, policies, or shareholder agreements.

Be aware of key dates

There are a number of important dates to be aware of, including:

  • Confirmation statement, which is sent to Companies House every 12 months
  • Annual accounts, which are submitted to Companies House every 12 months
  • Tax return, which is collated and sent to HMRC annually within 12 months of the tax year-end
  • Corporation tax must be paid to HMRC within 9 months of the end of the accounting year

Hire someone to help

If your finances allow for it, consider hiring an accountant. Administrative work can be lengthy, so bringing someone new into the team can help reduce the pressure on you. This can be another shareholder, who could potentially be a family member.

Be open about your finances

This is especially important if there are multiple shareholders. If things are looking good - or bad - then be honest and open with everyone who has an interest in the business.

Make the difficult decisions

You’re now making decisions for the company, and not just yourself. Remember, in the event the company fails you’ll no longer be at risk of being financially accountable. That being said, this is a business you’ve been running for some time, and you need to have the bigger picture in mind when making decisions.

Continue running your business

With the change in your company status comes a change in job title for you to Director. However, the day-to-day operations of keeping customers and clients happy shouldn’t change, so continue using all your skills, knowledge and experience to deliver at the highest standard.

Let Hoxton Mix take some of the stress from you

Give your company that extra bit of oomph by having your registered address be in the heart of London. Check out our virtual office services for more information.