We specialise in helping clients to organise their business strategy in the most effective way and whenever we speak to our clients about starting a limited company it is clear that there are a number of myths around.
In this post, we wanted to take a quick look at a few of the things that people often believe about starting a limited company and give you the lowdown on whether they are true or not.
We’ve split these down into three categories; things that are true, things that aren’t true and things that are kind of true in certain circumstances.
So dive in and check out our points and if you have any questions then feel free to comment or contact us for more information.
True
It’s a quick process
There have been great strides made over the last few years to speed up the process of forming a limited company.
It’s possible to form a company using a standard set of memorandum and articles and we can certainly form simple companies within an hour or two.
You only need one director
The good news is that for a simple limited company all you need is one shareholder and one director.
They can even be the same person and this is what makes it so suitable for our contractor clients who don’t need a whole board of directors or external shareholders.
Note however that the rules are different for PLCs that need at least two directors and a company secretary.
The company is a legal entity in its own right
This is perhaps one of the most difficult things to get your head around but the limited company is an entity in its own right and has a series of rights and responsibilities.
Probably the best way to think about it is to imagine it as a real person.
So for example, you wouldn’t take and use a car belonging to another person without permission and if someone else created some Intellectual Property(IP) then it would belong to them.
The same is true for the limited company, if it creates IP in its own right then it owns it. Its assets belong to it and not the owner, although if the owner is a 100% shareholder then ultimately they own the value of the company.
The company can have its own bank account
Related to the point above, if we think of our new limited company as a real person then they can have their own bank account.
This means that all money owing to the company should be paid into the company bank account as should all money that needs to be paid out.
But this doesn’t mean to say it is a legal requirement; a company can exist without a specific bank account but life is much harder as a result!
Contractors can use a limited company for their work
Limited companies have a huge number of benefits for contractors so they make perfect sense if you are working in temporary engagements.
They help with tax planning and they are useful for insulating yourself against some legal claims but see “A limited company director is always protected” below.
If you develop a consistent business with valuable IP then you may well have something to sell at a later date and when you are pitching for work a limited company provides you with extra credibility.
Not true
A limited company protects your trademark
Unfortunately just because you have registered a company name at Companies House, doesn’t mean that you have a fully protected trademark.
A company registration is useful in the case of a dispute but it doesn’t take the place of official trademarks and copyrights.
You can pay yourself what you like
Again this isn’t true.
There are specific rules around what can be paid out and how it should be done.
If you own 100% of the shares of your company and you are the sole director then it is true that you make all the decisions but you still aren’t able to pay dividends when you have no distributable profits for example.
The important point here is that before you decide to pay yourself you should check that you are within the law. Call us now and we can help.
There aren’t any rules
Sadly not true and this is one of the downsides of running a limited company.
Limited companies need to file their accounts annually with Companies House and the directors need to make sure they act within the rules set out in their articles of association.
Self-assessment returns also need to be submitted to HMRC and the directors have to abide by company law in all their dealings.
If you don’t trade then you don’t need to file accounts
All companies need to file accounts with Companies House and submit a self-assessment return to HMRC, even if they have never traded.
Admittedly for a company that hasn’t traded this may seem like overkill but you still need to comply, otherwise you could end up facing penalties.
You always need to register for VAT
The VAT registration rules are the same whether you are a person or a limited company.
This means that in most cases if your turnover is over the threshold (currently £85,000 pa) then you must register for VAT.
However, under that value, you are not required to register and this goes for all types of businesses.
Its money is your money
Again, a limited company is an entity in its own right and its money belongs to the company and not to the directors or shareholders.
This is a big change from being a self-employed person where the business money belongs to you.
As a 100% shareholder and director you could pass a resolution to pay yourself more money or a bonus or dividend, but if you have other shareholders then there are more rules to abide by.
The important message here is to keep the limited company money separate from your own and make sure that you document your decision-making process.
You need a company secretary
This used to be true but since The Companies Act 2006, limited companies don’t necessarily need to have a company secretary.
This is not the case for PLCs that DO need one.
There is an important point here though. Just because you don’t have to have a company secretary doesn’t mean it is a good idea to operate without one.
A professional company secretary will save you time and effort by filing things like your confirmation statement and company accounts on time and avoiding penalties for non-compliance.
If you are running a busy company then it is easy to miss filing dates and carrying out administrative tasks just takes you away from the important work of working on your business.
We offer a very competitively priced company secretarial service so call us now and let us show you how easy it could be.
It costs a lot of money to start a Limited Company
This certainly isn’t true, although it could be!
There’s a wide variety of different ways to start a company and if you go to a lawyer and get them to draft a bespoke Articles of Association and a complicated shareholders’ agreement then yes it can be expensive.
By the same token, you can go to an internet-only formation agent who will give you an off the shelf service with no advice whatsoever that you only later realise is not right for your needs and costs a lot of money to undo!
The best bet is to look for a firm that understands the pros and cons of forming a limited company, that can advise you as to the best format and understands the tax implications.
Like us!
Kinda true
You can save tax
Yes, this is true, but it’s an area where you really do need to take advice.
Whilst there are a few ways that paying yourself through a limited company will save you cash, HMRC has tightened up a lot in this respect so schemes that promise to reduce your tax to almost zero are likely to be frowned upon.
Also, the tax benefits to owning a limited company have been reduced over the last few years so it is important that you are advised by someone that knows all of the allowances that you are entitled to.
If you want to use a limited company to save tax then contact us and let’s talk, but ideally do it before you start your business.
A limited company director is always protected
Owning a limited company is a good way to provide some protection for the directors but be aware that there are some instances where they may have little or no protection.
As we said earlier, the company is a legal entity in its own right so if the employees do something wrong then it is generally the company that gets sued and not the staff.
But in some cases, if the directors knowingly break the law, they can be personally liable and this is why it is important to have comprehensive director and officers insurance and to take professional advice.
Anyone can do it
Yes, this is also sort of true.
There are only a few cases where people are not allowed to start a limited company.
Directors must;
- Be over 16 years of age
- Not be an undischarged bankrupt
- Not be disqualified by a court
- Not be the company auditor
But if you don’t belong to any of the above groups then you can start a UK Limited Company.
Personal and financial information will be in the public domain
This very much depends upon what you want to be published.
When you start a company you are required to give your name, date of birth and a service address to Companies House for your director’s record.
However, you can use any address as a service address, which means that you can use the office of a professional advisor. This is a service we offer to our clients.
This means that your personal address won’t be in the public domain.
The smaller the company is, the less information is required to be filed each year. Micro companies (businesses with a turnover of less than £632,000) can actually choose to file very little financial information.
Don’t listen to rumours
When you set up a limited company you are making a big business decision.
It’s really important to get it right from day one because making changes later can be difficult and often, expensive.
So make sure you don’t listen to rumour, hearsay or the guy down the pub.
Get advice from professional, experienced people who know the pitfalls and the best way to achieve your business goals.
We specialise in helping people start and run their companies in the most tax-efficient way possible and we’re always happy to help.
Call us now on 01737 652 221 or email contact@yourfinanceteam.co.uk and let us show you how easy it could be.