Many people struggle with the procedure of setting up a limited company. Therefore, we have come up with a friendly guide on how to set up a private limited company. Before we get into all the details, lets first figure out the difference between an individual and a public limited company.

Difference between a public limited company and a private limited company

The only similar thing between both types of companies is that shareholders own them. These shareholders tend to make investments in the company. Now let’s jump to the differences. In general, the significant difference is that a private limited company is way less formal than a public limited company.

  • A public limited company is bound to have a share capital of at least £50,000. On the other hand, a private limited company does not have any such restrictions and can have any amount as its share capital. 
  • With a public limited company, you can trade the shares on a stock market publicly. Whereas, you cannot purchase shares on the stock market if you are running a private limited company. Moreover, private limited companies have the liberty to have a single shareholder who can also act as the director. Public limited companies need to have more than one shareholder.
  • A private limited company is required to file tax returns within nine months of the taxation year. Whereas, a public limited company has to file tax returns within the first six months of the taxation year.
  • Other than all these differences, a public limited company is bound to have a trading certificate before they initiate trading. Moreover, it is also linked to include AGMs as well as a qualified secretary legally.

Costs associated with starting up a private limited company

In the UK, if anyone wishes to register their company on paper, it costs them a total of £40. However, there are other ways that you can avail to set up a limited company, and it costs less.

One package allows you to register for only £12. However, there are specific requirements that you need to fulfil. These include:

  1. All things required for set up are organized.
  2. Shares will limit the company
  3. The company should use articles of association.

You have the liberty to pay via a credit card, debit card or PayPal. It usually takes 24 hours for the company to get registered. Moreover, it is essential to note that being a director of the private limited company comes with significant responsibilities. Your workload is increased by double, and you have to make sure everything, including handling information and running the company.

Ten important things to keep in mind before starting a limited company!

Once you have decided to start working under the label of a limited company, you should keep the following ten things in mind.

Understanding the limited company

In terms of the law, a limited company is known as a moral person. In simpler words, the limited company has an identity of its own with a name of its own. Similar to a person, it can take loans, make profits or lose money and pay taxes. It is considered as a separate identity. The limited company also has its bank account.

It is essential to consider a private limited company as a separate entity. It helps us better understand how things work within a limited company. We can compare a private limited company to a newborn baby. As soon as the baby is born, it is registered as a new individual in the state. The same happens when a limited company is born. It is registered as a separate entity with the Companies House.

Things you need to have at hand when setting up a limited company

Before anything else, you need to come up with the name of your limited company. Furthermore, you need to have a company address and decide the people who you are going to work with for the company. It is advisable and a wise move to pick a name that is not directly related to the business you are going to run, in case you decide to change what you trade in the future. 

Issuing Shares

You need to make sure that all the shares are divided proportionally considering the capital. Once you have fulfilled this requirement, you can have as many shareholders for the company as you wish. It is advisable to sell shares to different people so that when any disagreements or issues arise, someone can act as a middleman to solve it. Moreover, it is essential to keep in mind that when you sell a share to someone, you are supposed to pay Stamp Duty to HMRC.

Register your company with Companies House

Once everything is ordered, and you have made firm decisions, you can register with Companies House for a pretty low amount. The whole process is easy and can be completed in a matter of minutes. Once you have submitted everything, Companies House will take it from there. They will cross check the name you have given in. Moreover, they will request you to appoint one director for the company. You can nominate more if you wish so. You can also take the help of a professional account to complete this process if you are unsure about anything. 

Memorandum of association

You are required to register for the Memorandum of Association at the Companies House. This is simply a document that has all details about why you have taken the initiative of working under the label of a private limited company. The report comes in handy every time you are stuck with some tax problems or other legal matters.

You can either write the document yourself or have the service of professionals to do it for you. Whichever option you go for, make sure you keep it simple. The purpose of the company and how it will function should be mentioned. It is advisable to take the help of a professional accountant to fill this document. The only reason for this advice is that it can act as a sensitive and vital document in legal matters. So, having everything correct and in order is very important.

Assistance from a professional company formation agent

We have mentioned before that there are lots of things that you can do yourself in the whole procedure. However, we still recommend that you take the help of a specialist in this matter. Several problems can arise during the setting up process which you may let go as unnoticed since you are not a pro at it. Therefore, to keep yourself safe and to avoid tax issues, you should consider hiring a company formation agent. It does not cost much to hire them. However, they can save a lot when it comes to legal issues and tax problems. With the help of a specialist, you will be able to avoid a lot of trouble and get out of any complications.

Assistance from a professional accountant

It is also vital to consider hiring the services of a professional accountant. Chances are you will get this service for free. Accountants have made up formation packages and if anyone of them suits you can go for it. However, you can also ask them to alter any package if you wish to do so. The package usually includes the following:

  • Setting up the limited company
  • VAT registration
  • Bank account referral
  • Corporate tax registration

The accountant takes on the responsibility to handle all your taxes and payrolls. Moreover, their advice is often constructive and profitable, so you shouldn’t miss that either.

A separate bank account for the company

Since the private limited company has an identity of its own, it is essential to have a business account for the company. However, you should keep in mind that opening a business account is not as easy as it may sound. It comes with its difficulties. The help of an accountant can be considered here as well. They can design a perfect proposal for opening the account as they know what’s required in the project and what’s not.  

Registering for VAT

We cannot emphasize enough how important this step is. You would not want to mess with the HMRC institution or its legislation. They have made it pretty easy for you to register with the online services at the HMRC website. Moreover, filing for VAT online is pretty quick and straightforward as well. HMRC might delay your registration. However, you should stay patient as it will happen, and you can backdate the bills of your clients. A professional accountant can easily keep track and manage all of your VAT. However, you can do it yourself with online forms and services.  

Claiming startup expenses

This point has come at last, but it shouldn’t be missed. Any costs that you may have incurred while setting up a limited company can be claimed against the future revenues of the company. 

The advantages of a limited company

Setting up a limited company has its perks. Let’s have a look at them one by one:

Tax-efficient

One of the most significant benefits of a limited company is that it is the most tax-efficient business structure out of them all. A limited company is taxed after the amount of £11,850, which is the greatest not being imposed for any business structure. The remaining amount is paid via dividends with which you don’t have to pay national insurance contributions. There is also a lower tax rate applied to profits. 

Limited liability

This is another great advantage of a private limited company. Since it is an entity on its own, any debt or losses incurred will be borne by the limited company. The owners/directors own assets and finances are safe. Any liability has to be paid back by the business and not you.  

Separate entity

This has been mentioned before. The law treats the limited company as a separate entity. Consequently, it is protected in a situation where the business fails. The owner will not be disturbed personally.

Professional status

Having a professional status is a great benefit. The limited company has its name which no one else can take. Since it is registered with Companies House, the company’s name is trademarked. Having a professional title and vibe also comes with its benefits. The company can come off as big and attract customers. Consequently, it can result in winning loans and funding etc.

Company pension

A limited company has the liberty to invest in a company pension scheme before it pays any tax. As a result, money is saved.

Maximizing tax-free income

Another advantage of a limited company is that you can increase your tax-free income quickly by making your family shareholders. These include your children, wife etc.

The disadvantages of a limited company

As much as the advantages may attract you, the limited company does come with some drawbacks. These include:

Complicated to set up

Yes, limited companies come with lots of perks, but they can be pretty complicated to set up. This is in comparison to other types of business structures such as sole traders.

Complex accounts

Handling the accounts of a limited company is also a pretty complicated thing. This includes filing tax returns and handling all the expenses. Keeping HMRC happy is not an easy task with a limited company.

Accountancy costs

You cannot manage the bookkeeping of a limited company without the help of a professional accountant. And these can be costly.

Ownership

You have to share the company with other shareholders. Their views and disagreements have to be taken into account, and not all decisions can be made by you alone.

Public records

Another drawback of being a limited company is that you have to make all your information go public. This is because you will be registering with Companies House.

In Conclusion

Setting up a private limited company can be a tiring process. However, it is worth all the benefits it brings with it. You need to make sure that the business that you are into is viable for a private limited company business structure. If it is, then you should not wait and go for it!