If you are self-employed, you have the option to set yourself up as a limited company.
A limited company is an organisation that you set up to run a business. Like being a sole trader, you can set up the business so that you work alone, and run the business alone as a solo entrepreneur. The difference between being a sole trader and having a limited company is that the finances of a limited company are separate to your finances, and the responsibility for the business lies with the limited company. The company owns any profit it makes, and after paying Corporation Tax, can then share those profits out among the people who run the company. Of course,if it is just you who runs the company, you take note profits.
Who owns a limited company?
The easy and straightforward answer is that a limited company is owned by it’s members. This means that if you are the only member, you own the company in it’s entirety. From selling your products to managing the business and beyond, ownership and responsibility is with you. If you have set up the company with other people however, ownership is shared between all of you.
A limited company needs a director to ensure that the company is run well and run according to regulations. If you are the owner of the company and the sole person, you are the director. If there are more people involved in ownership, a decision will have to be made as to who the director is.
Being a director carries significant responsbility outside of making sure the company is run well. The director must maintain company records and report to HMRC( HM Revenue and Customs). This means keeping HMRC up to date with changes and registering a tax return every year.
As a limited company, you will pay Corporation Tax (otherwise known as ‘business tax’). This means taxable profits, including money raised from trading, investments and the sale of any assets. If you do not set up your limited company for paying Corporation Tax within three months of setting up for business, you could face a fine from HMRC.
If you have been a sole trader, you will be used to receiving a bill from HMRC informing you of tax you have to pay. This does not happen with a limited company. You fill out a company tax return and work out how much you are liable for with your taxable profits.
If you are the director, this is your job. You can hire an accountant obviously, but responsibility lies with you and only you.
This is a basic explanation of what a limited company is. Bear in mind the key takeaways here. You can own and run a limited company yourself, but all responsibility lies with you. reporting for tax with HMRC is again your job. If other people are involved a director must be appointed. That director has sole responsibility for the oversight of the company as well as dealings with HMRC.
Next, we will look at how to set up a limited company so that it meets legal requirements.