Running your business using a limited company has some benefits, e.g. potential tax savings. This contrasts with running the business as a sole trader or ‘normal’ partnership, e.g. a limited liability company.
Running a limited company includes a number of considerations. These are listed below:
An individual may operate as a limited company opposed to a sole trader for the potential tax savings alone. However, the issue of limited liability should still not be overlooked. This basically means that the shareholders are only responsible for company debts up to the limit of their investment in the share capital. E.g. an individual subscribing for 100 £1 shares in a company should only be liable for £100 of debt of the company. This is paid at the time of the share subscription. In contrast, this does not apply if the individual has personally guaranteed a debt of the business.
The management of a company is directed by its Articles of Association. A company must meet its obligations under the Companies Act. These include the filing accounts which can also be accessed by the public.
It is important to be aware that a limited company is associated to any profits. A limited company is also a separate legal entity to its owner(s). The director or shareholder of a limited company can withdraw profits as a salary or dividends. In this case, the profits that are drawn are subject to income tax (see below) However, any undrawn profits (after corporation tax) can remain within the business for re-investment. This differs for partners or sole traders. This is because the partners or individuals are taxed on the businesses profits. This is in contrast to the monies drawn from the business.
A limited company may be perceived to be larger than it actually is. Trading via a limited company provides a corporate identity advantage. Furthermore, limited companies have been known to only do business with other limited companies.
At the outset of a business, we would recommend that a shareholders agreement is prepared. This covers situations when there is more than one shareholder or director. This avoids potential issues further down the line. E.g. if a director or shareholder falls out. For husband and wife shareholders, we would still recommend this agreement to be made.
Owner managed businesses operate on the basis that the director can take dividends from profits within the limited company. This is because the director is also the owner of the business. This is usually more tax efficient than drawing a salary. However, it is important to judge individual businesses on their own merits. There may be reasons why a business owner is taking a large salary. These include:
Companies are required to complete corporation tax returns. This ensures that companies have declared their profits to HM Revenue & Customs. Businesses should be aware that whilst corporate tax rates are lower than income tax rates, additional taxes may occur. These will be payable by the directors or shareholders on the withdrawal of monies from the company. This can be either via a salary or dividend. Normally, corporation tax is payable 9 months and 1 day after the company year end. However, this excludes when company profits exceed a certain level or if there are a number of related companies.
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