If you’re looking to start working as a contractor in the UK, the most tax-efficient way to do so is usually to set up a limited company. When you set up a limited company, your liability is limited, meaning that your personal money stays separate from your business’s money. This means that you have a low-risk company on your hands.
For example, if you set up a limited company but it goes bust, then you are not liable to pay back any debts accrued by your own company – your personal finances are kept separate and are not affected by the limited company. In this sense, you have “limited” responsibilities when compared to other businesses.
Limited companies, in addition to sole traders and other similar structures, form the backbone of the UK’s SME sector. In fact, it is estimated that there are roughly 1.9 million limited companies in the UK, contributing a huge sum to the British economy.
If you are looking to set up a limited company, there are many ways to form a company with the help of trusted advisors such as our own, with Pearl’s Formation Agents helping you with company formation online, setting you up with everything you need to start, register, and run your limited company.
However, here we’re going to go into final detail and tell you exactly how to set up a limited company legally, efficiently, and profitably. Our company formation online service can help with this if you’re not sure about any of the steps or if you would simply like to have a professional sort out all the paperwork and registrations for you.
Limited companies – an overview
Before we can tell you how to set up your limited company, you must first fully understand what a limited company is. Put simply, a limited company is a business that the law refers to as a “moral person”, meaning that it has its own distinctive identity and name which it performs business under.
For all intents and purposes, the law treats a limited company like it is a person who has a bunch of responsibilities. For instance, it treats a limited company as a person who is able to make money, lose money, gain debt, and pay their own taxes independently of anyone else. As such, the company has its own bank account which is treated separately from your own.
As our startup accountants will tell you if you’re setting up a new limited company, your company cannot have a bank account under your name – it must have an account under the company name. The whole point of a limited company is that it is a separate entity which is separate from you, even if you’re the sole owner of the company and you run all the operations alone.
When you set up a limited company, it is registered on an official list of companies which is kept by Companies House, a division of the UK government. Once the company is registered here, it is legally seen as an entity which is separate from you, its owner. It may sound like we’re really driving home the idea of a limited company being separate from you, but it informs so much of the legal processes around it!
Whether you’re setting it up alone or you’re working with
the Pearl Accountants team, you
first need to choose a name, decide where your company is based, and then
decide who’s going to be involved in it, even if that is just yourself.
When it comes to picking a name, there are several articles online providing you with tonnes of useful naming advice, such as this article from Forbes. Generally speaking, you want a name which is easy to spell, easy to remember, not taken by anyone else, and not too restrictive.
I mean, what if Steve Jobs and co. had gone with a more specific company name when they founded Apple – let’s say that they called it “Home Computers” instead. Even though the name “Home Computers” would have been relevant in the ‘70s, ‘80s, and ‘90s, what about when we get into the 2000s and they’re creating music players and smartphones? Suddenly, the name “Home Computers” is a bit restricting, whereas “Apple” has no specific connotations and can be adapted to mean anything.
Hopefully these first initial stages should be pretty simple to nail down, however, if you’re having trouble, our business and tax advisors possess a wealth of experience and expertise in company formation online and face to face. It doesn’t have to be hard to form a company if you work with one of Pearl’s talented specialists!
To help explain shares, let’s use a hypothetical example. Let’s say that a limited apparel company called “Chic” is being set up by 2 contractors, Jane Doe and John Smith. Both Jane and John work at Chic, so they decide to issue £1,000 worth of ordinary shares and own 50% of them each.
If this is how the limited company of Chic is set up, then any dividends paid out to the shareholders (Jane and John) will be split up 50/50 so long as they are coming from ordinary shares. However, if a preferential share division was employed, then this would not be the case for the company.
If Jane and John want to include other shareholders in the company too, then they are able to do so. However, the total shares must be divided proportionately to the capital. As a result, it is often useful to sell one share to another person (or buy one share from another person) so that someone can be the majority shareholder and make a decision when everyone else is in a stalemate.
There are many different types of share that a company can have, such as redeemable and non-voting shares, but for this example, let’s assume that John and Jane have been handing out ordinary shares. Ordinary shares, generally speaking, are the simplest form of shares, giving each shareholder voting rights in the company’s operations.
Assuming that John and Jane give out ordinary shares to their shareholders, they will be able to split voting rights in the company among more people. However, if they want to use more complicated shares systems, such as the ones mentioned earlier, they would ideally need to speak to a professional who can help them.
For example, preference shares and redeemable shares often come with tax liability issues which are best sorted out by a tax professional such as one of Pearl Accountants’ Formation Agents who can help you with company formation online and ensure tax efficiency throughout your company structure.
Despite the charming name, Companies House is more of a governmental division than a building where all the companies live. Either way, once you have made all the important decisions we have already listed in this article, then you need to register your company with Companies House for a low fee which is usually around £20, although the rates can change with each tax year.
Companies House is there to take down all of your company’s details for official government records. This is not dissimilar to registering a baby’s birth at the registry office, and it can be very difficult and costly to change a company’s details once they have been registered. For this reason, you should be absolutely sure about all of the details before heading to Companies House.
Well, I say “heading to Companies House”, but this process can be done over the internet, helping you to perform company formation online. The Companies House online portal will guide you through the setup process. They will check whether your proposed business name is already in use, and you will need to change/adapt it if it is.
Once the name is selected, you’ll be asked to name a company director and company secretary. In this sense of the word, a “company secretary” is someone who deals with the accounting and financial side of a business. Many accountants services, including Pearl Accountants’ company formation online service, will register the company accountant (i.e. Pearl) as your registered company secretary at Companies House.
However, if you have the skills and business acumen required, then a single person could occupy both roles in a limited company. The owner of a business could indeed be registered as both the company director and company secretary of a limited company. Do bear in mind that you have numerous legal responsibilities as the director of a company, and you should be aware of all of them before signing your life away on an official government register!
Memorandum of Association
The Memorandum of Association is a very old-school sounding document. It is basically something which you file with Companies House to tell people why you have set up the company and how you plan to operate it going forward. It may seem obvious why you want to run a company – in order to make money – but the part about how you intend to run the company is very important, so consider having it checked over by a business tax advisor.
You see, your Memorandum of Association document can play an important part in legal proceedings and tax disputes if your company ever lands in hot water with HMRC. For example, if your company is scrutinised for the IR35 tax laws, meaning that you are passing off employees as self-employed contractors for tax benefit purposes, then this document will be inspected closely to see exactly how you planned to run your operation and manage your employees and/or contractors in this case.
Now, you are indeed able to write the Memorandum of Association document by yourself, but we would advise you to keep it very simple if you wish to do this. For example, there are many helpful organisations supplying online templates for Memorandum of Association documents. You must clearly state what your company’s intentions are and how you plan on running it in the document.
Still, the scope and size of a company can inevitably change over time, and this document will be closely assessed if your company ever has legal troubles. For this reason, it is very strongly advised that you seek the help of qualified accountants or business advisors, such as our own, who can help you out with company formations online, including writing Memorandum of Association documents.
When you want to form a company, especially if it is a company with an unusual structure or unique tax liabilities, you might want to work with a specialist such as Pearl Accountants who can help you to set everything up with HMRC, Companies House, your bank, and all the other relevant parties. Whether you go with us or someone else, it is nonetheless advisable to seek specialist help about the next steps of setting up a limited company, especially if you’re new to the business world and have limited experience.
For example, if you want someone to look over your Memorandum of Association, Pearl’s trusted company formation online experts can suggest different company structures which may have tax benefits, or they can suggest important conditions which affect your Memorandum of Association and help it to be beneficial to you in the long term.
Working with accountants
If you work with Pearl Accountants to set up your limited company, you will be able to have your company formed online for as little as £1. This includes setting up your limited company, registering it for VAT, corporate tax registration and the necessary bank account referrals. We can also be listed as a Company Secretary for your business at Companies House, although this isn’t necessary.
Either way, you need to select a reputable accountants to work with after your company is ready to go. These accountants need to handle your payroll, taxes, and many other everyday business accounting duties. Working with qualified accountants is usually the most hassle-free route for a small or medium-sized company – you don’t usually need to hire an in-house accountant until your company grows to a reasonable size.
Here at Pearl, we are business growth accountants. This means that we not only help with your company formation online and perform all the steps necessary to set up your new limited company, but we also provide everyday accounting services and provide you with business advice which can help you to grow your business consistently and sustainably.
There are many ways to reduce your tax liability with HMRC, but you are probably inexperienced with reducing your tax bill if you have just set up a new limited company. Pearl’s trusted tax efficiency advisors can help you to harness tax loopholes and advantages at an early stage in your limited company, maximising the funds that you have available for investing in your new business and growing.
Business Bank Accounts
One of the inevitable steps of setting up a limited company is supplying it with its own business bank account. This is not as easy as you might imagine – you cannot stroll into your local Halifax or RBS and expect to have it done in 20 minutes. There are many helpful websites advising you on the best banks for opening business accounts in the UK, so be sure to do your research before settling on one for sure.
Nonetheless, if working with an experienced business consultant and/or accountant, they are probably able to recommend a couple of their go-to banks when it comes to setting up new businesses in certain niches and industries, making it easier for you to know who to go with. If you choose the right bank, the setup process can be achieved in mere hours, and your limited company will have its own separate bank account in no time.
According to the official UK government website, the VAT threshold will remain at £85,000 taxable turnover until April 2020. This means that if your business is going to see a taxable turnover of £85,000 or more over the year, then you need to register for VAT with HMRC. Usually, this is the last step involved in setting up your new limited company.
There are new guidelines which stipulate that you need to go digital and create digital links between your financial systems and bookkeeping systems as of the new tax year. The process is called “Making Tax Digital” and you can find out everything you need to know (Overview of making tax digital) although a business accountant will already have knowledge of the new system and will make sure that your limited company complies with the government’s new digital regulations.
Any start-up expenses (i.e. any expenses spent on the processes listed above) can be claimed against the future revenue that your company makes. This makes it easier for you to save money when your company is just starting out and beginning to gain revenue.
Whether you want to form a company on your own or get help with company formation online from Pearl Accountants’ dedicated formation agents, be sure to follow all the steps listed above and run your new limited company like a well-oiled revenue-generating machine!
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.