Why set up a private limited company? After all, setting up a limited company is likely to involve more administration and higher costs than if you were working as a sole trader.
Essentially, the decision as to whether you set up a private limited company depends on whether you are happy to accept personal financial liability for your business's debts. If you're a sole trader and your business fails, you're personally liable for its debts. Potentially, you risk personal bankruptcy if the debt is considerable and you can't pay it back. Setting up a limited company offers protection against this.
(You can use a sole trader versus limited company tax calculator to estimate your take home pay with either type of business, simply by inserting an estimate of your annual profit.)
Should I set up a limited company?
A limited company is a separate legal entity and as such, legally, it's responsible for its own actions. The finances of private limited companies are entirely separate from those of its owner(s). Private limited companies can have one or more shareholders, but shares cannot be sold publicly (ie on the stock market). Public limited companies, of course, can do this.
Providing you don't trade recklessly or fraudulently, as a director of a limited company your risk of loss is restricted to money you've invested in the company. However, you're liable for bank loans if you provide personal guarantees for that limited company.
To an extent, being a private limited company might make you more credible to potential customers, partners or investors.
How do I set up a limited company?
To become a limited company, you register ('incorporate') online at Companies House. Alternatively, for a small fee, an accountant, solicitor or agent can register the business for you. All you need do to set up a limited company is provide some basic information and a few signatures.
Ready-made limited company names are available to buy, should you wish. Alternatively, if you want to form a brand new limited company, you must send a memorandum of association, articles of association and a completed IN01 form to Companies House.
A memorandum of association details the limited company's name, registered office and nature of business. It must be signed by the director(s) in front of a witness. A registered office is the official limited company address, which is where Companies House will send notices, letters and reminders. The articles of association set out the rules for the running and regulation of the company.
Companies House cannot supply memorandum and articles, but these can be bought from a legal stationer or company-formation agent.
What responsibilities do limited company directors have?
Private limited companies must appoint at least one director, who can also be a shareholder in the limited company. Someone cannot assume this role if they've been disqualified from acting as a limited company director; if they're an undischarged bankrupt; or are younger than 16-years-old.
Private limited companies no longer have to appoint a company secretary. Directors of private limited companies are responsible for notifying Companies House of changes in the structure and management of the company.
Accounts must be filed with Companies House each year ahead of the requested date, otherwise a fine is payable. Unless the company is exempt, accounts must also be audited annually. The company (or its accountants) must inform HM Revenue & Customs, by means of an annual return, of any taxable income or profits. Corporation Tax is then payable.
Company directors are employees of the company and must therefore pay income tax and Class 1 National Insurance contributions. Profit from limited companies is usually distributed to shareholders as dividends.
NOTE: If you are generating an income from your business, you may need to register for self-assessment with HM Revenue & Customs, complete a self-assessment tax return and pay tax on your earnings.