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A limited liability company (often the shorthand of ‘limited company’ is used to describe this trading format) is a company whose liability is limited by shares and is the most common form of trading format. The company is owned by its shareholders. The company is run by directors who are appointed by the shareholders. The shareholders are liable to contribute the amount remaining unpaid on the shares – usually zero as most shares are issued fully paid up.

The shareholders therefore achieve limited liability.

A company needs to be registered with Companies House and cannot trade until it is granted a Certificate of Incorporation. The registration process is a quick and inexpensive process using Companies House’s web incorporation service (it currently costs £15 and is completed within 24 hours). Some people use a company formation agent (Google this term to find such an agent – there are plenty of them) and the process should cost less than £50. The company name needs to be approved by Companies House and no two companies can have the same name. Names that suggest, for instance, an international aspect will require evidence to support the claim and certain names are prohibited unless there is a dispensation. An example of this latter category would include ‘Royal’. You must appoint a director and this ‘officer’ of the company carries responsibilities that can incur penalties and/or a fine. The appointment of directors should therefore not be done lightly. The full range of responsibilities is set out in The Companies Act; further guidance is available from the Companies House website. Some examples of the responsibilities include the duty to maintain the financial records of the company, to prepare accounts, to retain the paperwork and to avoid conflicts of interest. Small businesses no longer have to have a separate Company Secretary but it can be useful to have another officer holder signatory and the risks associated with this position are relatively light. In addition you will need to appoint a registered office, which is a designated address at which official notices and communications can be received. The company’s main place of business is usually used as the registered office but you could also use the address of your accountant or solicitor (there may be a charge for this).
Limited liability of shareholders.  
In certain circumstances, directors may incur unlimited liability if they are found liable for fraudulent or wrongful trading.
Perceived credibility.  
Formal accounts have to be prepared and filed at Companies House within nine months of the accounting year end. An annual return detailing the ownership of the company also has to be filed each year. Failure to deliver documents on time will result in a fine.
An accountant will generally be required to prepare annual accounts but no audit is required for companies with a turnover of less than £10.2 million.
Transparency of company name, accounts and directors at Companies House (if operating an especially sensitive business; consider obtaining a confidentiality order that helps mask personal information).
Employment agencies and recruitment consultants may require you to work through a limited company (or umbrella company).  
More taxes to deal with.
Every trading company must submit a corporation tax return.
Directors who are also shareholders will usually receive their income via salary and/or dividends. Salaries are paid through PAYE and, therefore, a PAYE scheme will need to be set up and administered.
HMRC requires all directors to submit self-assessment tax returns.
NICs paid by a limited company may come as a surprise to new owner-directors. NICs are dependent on the salary drawn and are paid by both the company and the employee. This double NIC ‘hit’ means that a director taking profits as salary will pay more than double the NICs of a sole trader taking the same level of income. Income paid as dividends is not liable for NICs. Due to the significant savings derived, this has caused HMRC to review contracts and the level of dividends closely, under a regime known as IR35 which has been in place since 6 April 2000.
IR35 and other tax ‘pitfalls’ (one of which is ‘income shifting’) will need to be understood and, if applicable, addressed.

This guide can only give an overview of how to set up and run a limited company and you are strongly advised to review the publications provided free of charge by Companies House.



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