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Beginners guide to setting up a limited company

So, you want to set up a limited company? It sounds like you're just about to start the next exciting step for your business. Here's everything you need to know and do to set up your trades business as a limited company.

Deciding to take the leap from being an employee, sole trader or contractor to set up a limited company may be the best decision you ever make.

Not only will you reap a range of benefits, but you’ll be the proud owner of your own business.

If you’re curious about what a limited company is, how to register a limited company or the limited company advantages and disadvantages, this article is for you.

We’ll be covering everything you need to know about setting up a limited company, from tax considerations to starting a limited company on your own.

What is a limited company?

When you’re a sole trader, your name is your brand. You’re responsible for the running of your business and any legal issues. Owning a limited company is very different.

So, what is a limited company? Firstly, limited companies are classed as separate legal entities to the company’s owners. This means, in most cases, if there are any financial or legal issues, the company is liable and not the owners.

Limited companies are registered at Companies House, meaning you can pick the name of your small business. Your limited company is also able to employ workers and take on contracts separate from its managers and shareholders.

What is a private limited company?

Now we know a little more about limited companies, you may be wondering what a private limited company is? Limited companies can be classed as public or private with a few differences between the two types.

The main difference is that public companies trade their shares on the stock exchange while private companies don’t trade their shares publicly. In addition, private limited companies are usually smaller than public companies and can have up to 50 shareholders but no more.

Limited company advantages and disadvantages

In order to decide whether it’s worth you setting up a limited company, it may be handy to know the main limited company advantages and disadvantages. Below we have listed the main benefits to setting up a limited company, as well as any drawbacks:

Advantages

  • The owners of the limited company are usually not liable for company issues like debt or legal problems
  • You’ll see reductions in corporation tax
  • Dealing with a limited company often looks better to clients than dealing with an individual or sole trader. A company feels more professional and credible, helping to attract more customers
  • Limited companies allow their owners to take dividends and salaries to make savings on income tax and national insurance
  • Your company name will be registered with Companies House so it can’t be used by other businesses
  • If the limited company enters into bankruptcy the owners or shareholders are less affected than a sole trader would be
  • Many large companies refuse to work with sole traders
  • You can claim back business expenses. For more information about what and when you can claim, why not check out our dedicated guide on expense claims?

Disadvantages

  • Your limited company will need to pay incorporation fees to Companies House
  • All corporate and personal information will be made public
  • Accounting for a limited company may be more difficult and time consuming, meaning it’s definitely worth hiring an accountant
  • You won’t be able to take money out of your limited company without following the correct procedures
  • You may not be able to register the company name of your choice if it’s already taken

sole trader or limited company

Is it better to be a sole trader or limited company?

Many people starting out in the trade business begin as sole traders, this is due to the simplicity of the start up process. They may then progress to setting up a limited company, but there’s no reason you can’t stay as a sole trader for as long as you wish.

So, is it better to be a sole trader or limited company? Well, there’s a range of differences between the two, and our sole traders vs limited companies guide is a great resource to explain these. For simplicity, we have summarised the main key points below:

Sole traders

  • Very similar to being self-employed
  • Sole traders completely own their businesses
  • Becoming a sole trader will generally involve less paperwork than starting a limited company
  • You’ll have more privacy than limited company owners do
  • If the company’s in debt, the sole trader’s liable
  • Big companies and banks would rather work with limited companies than sole traders
  • You may pay more corporation tax

Limited company

  • Limited companies are classed as separate legal entities from their owners
  • You may pay less tax
  • Limited companies are generally considered more trustworthy than sole traders
  • More information is made public

Another question many people in the trade ask is ‘is it better to be self-employed than a limited company?’ There is very little difference between being self-employed and a sole trader. Being a sole trader is a way of describing the type of business you own and being self-employed simply means you have no employer.

Why is limited company insurance important?

If you plan to start a limited company, you should definitely budget for limited company insurance. But why is limited company insurance important? Well, there are three essential types of insurance that will help to protect your limited company legally, these are:

  • Public liability insurance: This protects your company against injury or damages.
  • Personal indemnity insurance: This protects against legal action following bad advice to other businesses.
  • Employers liability insurance: This is a legal requirement to protect against legal action from injured employees.

How do I start a Ltd company

How much does it cost to set up a limited company?

If setting up a limited company seems like a great option, you may be wondering “how much does it cost to set up a limited company?” In fact, it’s not very expensive at all. You’ll simply need to pay to register your company with Companies House. It costs £12 to register online and needs to be renewed every year for £13.

If you would prefer to register by post, this will cost £40. It may also be worth hiring an accountant to handle your company’s finances as this can save you a lot of future headaches.

Can I set up a limited company on my own?

If you’re currently operating as a sole trader and are considering switching to a limited company, this can bring a wealth of benefits. However, many people ask, ‘can I set up a limited company on my own?’ The answer is yes, you absolutely can!

Unfortunately, many people are operating under the impression that you need more than one person to start a limited company, but this isn’t true. To make the switch, you’ll need to name a director and a member (shareholder) and this can be the same person. It can be great for those who prefer to work alone, and you can always add more directors or members at a later date.

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How to register a limited company

Once you’ve decided to move away from operating as a sole trader, you’ll need to know how to register a limited company. You can do this online at the GOV.uk registration page, or by post (although this will cost more). You can also hire an accountant to register a limited company for you.

How do I start a Ltd company?

Working as a sole trader is a great way of generating revenue, but have you ever wondered “how do I start a Ltd company”? If you have, don’t worry, the process is a little tricky but following the below list can simplify this for you:

  • Firstly, the most exciting step is to pick a name for your new company
  • You can then decide who will be directors and shareholders (remember this can be the same person)
  • Draw up a memorandum of association and articles of association. To learn more about these and access examples, please visit the GOV.uk memorandum and articles of association page.
  • Make sure you’re prepared to keep proper financial and company records. If necessary, hire an accountant to assist you
  • Next, register your business with Companies House
  • Finally, make sure you’ve got the necessary insurance in place

Do you pay less tax if you are a limited company?

It’s no secret that whether you’re employed, a sole trader or a limited company, you’ll need to pay tax. So, do you pay less tax if you are a limited company? In general, you’ll likely have less limited company tax liability, meaning savings overall.

What’s more, depending on your salary amount, you won’t have to pay income tax or national insurance. Although, having said this, not making national insurance contributions may affect your state pension. Instead, you’ll need to pay corporation tax, which is usually lower.

Owning a limited company also means you can take dividends as well as a salary. Thankfully, dividends are taxed at a lower rate than income tax, saving you money.

How do I pay myself from a UK limited company?

Before starting a limited company, it’s important to ensure you’re aware of the legal and financial ramifications. This involves taking a little time to learn the ins and outs of your new business.

Ever wondered “how do I pay myself from a UK limited company?” There are two different methods to choose from, these are:

  • Salaries: Salaries can be taken monthly by transfer from your company account to your personal account. You’ll still need to pay income tax and national insurance if your salary exceeds the amount set by the government
  • Dividends: These can be taken out of your business profits after any limited company tax has been paid. Plus taking dividends may mean you’ll pay less tax than you would income tax

Is it worth setting up a limited company?

We hope the information in this article has given you a better understanding of limited companies and their advantages over being a sole trader.

So, is it worth setting up a limited company? Only you can answer this question as it will largely depend on your circumstances. To help you decide, below is a summary of all we have covered:

  • Setting up a limited company will separate you from the business in the eye of the law. As such you’re less liable for financial and legal issues
  • You’ll likely pay less tax than a sole trader would
  • Limited companies are generally seen as more professional and trustworthy than sole traders
  • You’ll have the option of taking a salary and dividends
  • Your company name will be protected when registered at Companies House

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