As accountants, our job is to advise you about the best structure for your new business venture. We get lots of questions about the most tax efficient way to set up a company, the day-to-day running of it and most importantly, how you can pay yourself!
One of the most popular and best structures to operate your business is through a limited company. This can bring many benefits to the business and the owners of them. We’ve set out some of the basics of a limited company below, which hopefully might be helpful.
Limited Company, the basics
- A limited company is a business that has been incorporated at Companies House as a legal ‘entity’.
- It must have its own unique name to separate from its owners.
- The Company is responsible for its own actions, finances and liabilities. The directors are responsible for these to be upheld.
- The owners of a company are protected by ‘limited liability’, which means they are only responsible for business debts up to the value of their investments or what they guarantee to the company, unless they have given a personal guarantee.
Who are the owners of a limited company?
The owners of a limited company are known as the shareholders. One of their roles is to appoint the directors of the company to make sure the day to day running of the business is completed effectively. The shareholders are also responsible for removing directors, choosing which powers to grant directors, altering the share capital of the company and making changes to the articles of association.
This being said, the majority of small business are set up with the shareholders also being the directors and therefore are fully in control of the company.
Why would I form a limited company?
If you want to start a business for the purpose of making money for yourself you should set up a ‘limited by shares’ limited company. The main benefits being:
- It will allow you to subsequently sell shares within the business if you ever need outside investment.
- A limited company structure creates a professional image and improves credibility.
- Limited companies are more transparent as information is held about you and your company at Companies House
- Normally the tax treatment of a company is more beneficial than a sole trader or partnership.
What are the tax advantages of a limited company?
As a shareholder, it’s likely, that if your personal income from the limited company is above £30,000, it should be more tax efficient than an equivalent sole trader or partnership structure.
The corporation tax rate is currently 19% and, like a sole trader and partnership, is calculated after all business expenditure is taken into account.
However, as a sole trader or partnership (17-18 tax year), the first £45,000 (less personal allowance) of taxable profit is taxed at 20%, with profits between £45,001 and £150,000 being taxed at 40% and any subsequent profit above £150,001 taxable at 45%.
Furthermore, a sole trader/partner is liable to pay class 2 and 4 National Insurance to HMRC.
In comparison, a shareholder would normally take a salary and dividend out of their own company. The value of the salary being the equivalent of the tax free personal allowance per year and the remainder taken out as a dividend.
With this structure, the shareholder would not be taxed on the first £5,000 (2017-18) of dividends taken, 7.5% on the next £40,000 (includes dividends and salary declared), 32.5% between £45,000 and £150,000, then 38.1% thereafter.
Importantly, as a shareholder, you are only liable to personal tax if you actually take out the profits from the business. Leaving the money in the business, if you can, will mean you will not be liable for tax personally.
What to do now
If you have any further questions regarding advice on the best structure to set up your new business, please contact us.