I’ve started and run a few companies. Some well, some not so well. It can be complicated so here’s a distillation of my experiences starting with forming your business. I hope you find it useful – please let me know in the comments.
When you decide to work for yourself there are a number of different ways you can set up your business.
For a very small, lifestyle business doing things like selling arts and crafts, up-cycling a few pieces of furniture, or buying and selling collectables then you might consider being self-employed to be the best option.
If you want to run a business selling to larger organisations, expect to be making more than about £20,000 per year or need to attract investment, then you consider forming a new company.
You can also start a partnership with another person. This is essentially the same as self-employed where you have joint and several liability and all the business profits are subject to income tax.
Finally, there is a limited liability partnership (LLP) which restricts the liability of the partners in certain circumstances.
I’ll only cover limited companies and sole-trader in this small set of pages. We won’t cover Public Limited Companies (PLC), or partnerships of either type.
Depending on your needs you will end up with one of the following titles.
|Type of business||Your title|
|Sole trader||Proprietor or owner|
How to decide what type of business you want?
There are some pros and cons to setting up and running a self-employed business or a limited company.
Advantages of a limited company
A limited company is defined as a legal person. It is its own entity and has rights and privileges assigned to it in law. Its bank accounts, ownership of assets, involvement in tenders and contracts are all separate from the interests of the shareholders. The directors are there to make decisions on behalf of the company – they are its ears, voice, and brain.
The tax a company pays is dependent on its profits and has no effect on nor will they be influenced by any of your own income. A company can pay a number of different taxes but the one they all will pay, assuming they make a profit, is corporation tax.
The rates of corporation tax are similar to income tax however the higher basic limit is currently £300,000 so having your business wrapped up in a company means that you will pay less tax on profits if you earn more than the standard limit for income tax. Currently, the UK government is on a drive to reduce corporation tax. You can see the historic and current corporation tax rates here.
This is the limited part of having a limited company. It means that, unless there has been fraud or malpractice such as trading while insolvent, you are protected from any losses the company may make.
Negligence may also play a part in defining a director’s liability such as in the food industry.
When you start dealing with customers and suppliers you may find that some or many of them will only deal with a limited company. They will refuse to deal with a sole-trader.
For a customer, their reasons may vary depending on what type of entity they are. A large company will only deal with other companies – it’s a way of reducing or eliminating their liability if you do not pay proper taxes like VAT, PAYE and corporation tax. They also see a limited company as having greater longevity and stability than a sole trader. A sole trader can essentially up-sticks and cease trading when they want. It’s much harder for a company.
The smaller your customer is the less likely they are to be sensitive to your business’ status. Someone buying arts and crafts from you will be unlikely to worry if you are limited or a sole-trader. However, you should also bear in mind the tax advantages of running a limited company.
Your company’s name is protected
Once you have registered your company’s name it is protected by law. A sole trader would have to fight in the courts to protect a business name and there is no guarantee of success. That aside, anything that involves courts and lawyers is likely to be a cost you do not want to bear.
If you want to check your company’s new name is available you can search on the Companies House website. It will show you whether your intended name is available.
If you want to get on and set up your company but cannot decide on a name yet, then go ahead and get it formed with some generic name like “My Little Company”. You can change it at any time in the future.
Money and funding
As a limited company, it can be easier to get funding for your business. This can be by selling shares, getting loans or asking family or friends to inject some capital.
The reason for this is any money held is the responsibility of the company and is not part of the assets of the shareholders or directors. As a sole trader or partnership money in the business is considered to be the money of the owners or partners and is, therefore, less safe, from a lender’s point of view.
A company can issue many different types of share to enable it to raise money by selling shares to investors. These investors could be other companies, angel investors or friends and family.
If and when the company is sold these shareholders can recognise an increase in the value of their shares. On the counter-side of this profitable coin, though, they could lose their entire investment if the company fails.
Company succession is an important subject to think about. A limited company, via its shares, allow you to sell all or part of your company. You can also bequeath your shares to a new owner on your death. As a self-employed person, your business essentially dies with you. Grim eh?
Trading shares in your company is not allowed. That means you cannot actively promote sales of shares in your company unless you are registered and approved to do so. You will not be on the London Stock Exchange – not yet anyway.
Costs of a limited company
Forming a limited company can be done for £12 with Companies House. (Price correct August 2019) alternatively, you can use a company formation agent who will charge you more but offer various services such as the company documentation, bank account referrals, registered address, etc.
Company formation usually takes 24 hours and all the materials you’ll need will be delivered by email.
Other costs to consider are that of an accountant or bookkeeper. You’ll almost certainly want to engage one of these professionals to ensure your corporation tax submissions to HMRC are correct. The amount they charge will depend on what services you want from them and, of course, their own idea of their value to you.
Disadvantages of a limited company in the UK
Once you have decided on your reasons for forming a company – which might be your customers, need for investment, your expected profits, etc. Then you should be aware of a few restrictions and disadvantages.
Companies House registration
You must register your company with companies house. This will cost a small fee. There may be other costs such as getting your initial documentation set up.
A company in the UK must keep and maintain various statutory documents. Some of these are mandatory and some are only to be used when the need arises. These statutory documents are:
- Register of members (shareholders or guarantors).
- Register of directors.
- Register of directors’ usual residential addresses.
- Register of secretaries.
- Register of People with Significant Control (PSC).
- Directors’ service contracts.
- Register of charges and instruments creating charges (i.e. mortgages, secured loans).
- Minutes of board meetings and shareholders’ meetings.
- Copies of decisions and resolutions.
- Record of directors’ indemnities, (security against liability claims or legal costs).
- Record of debenture holders.
- Record of the sale of company shares.
Do you need to do this if it’s only you running the company? Yes, absolutely. As a director and/or shareholder you are not the company and you are as responsible for keeping these records as is the company secretary of a multinational headquartered in the UK.
Bankruptcy and disqualification
You cannot be a director of a company if you are an undischarged bankrupt or you have been previously disqualified from being a director. There are no restrictions to being a shareholder though.
One trick previously employed by un-qualified want-to-be-a-director types was to own all the shares then employ someone as a proxy director. The law was changed to make the definition of a director to be anyone with control of the company as if they were a director. So, no sneaking around the back.
Your details are in the public domain
As a director, your details such as your address are part of the public record. There are ways to have a service address for directors so, if you want to stay really private then use one of these.
There’s quite a bit of paperwork
Every year you will need to fill in various documents for Companies House and HMRC.
Depending on the size of your company this may be just an annual confirmation for Companies House which you can do online plus submitting your annual accounts.
HMRC will require your corporation tax submission – as well as the payment if any is due – every year.
All this paperwork is submitted online and it pretty easy if you are comfortable doing things in apps or browsers. The downside to all this paperwork, other than the paperwork, is it generally means you need an accountant or bookkeeper.
Withdrawal of money
You cannot use a company bank account as your own. Down that path lies a sticky end. You can get money out in one of two ways.
You can pay yourself a salary subject to PAYE or you can declare a dividend to pay yourself a share of the profits. You must have a profit to do this though. You cannot pay a dividend if you are running a loss.