Forming a limited company

Though we are offering advice on this page about forming a limited company, please note that our charity does not provide advice on company tax issues.

If you’re considering operating your business as a limited company, it’s important to seek professional advice to ensure you set up and run your company correctly. Here are some key points to consider:

1. Keep your personal and company finances separate: A company is a separate legal entity from you, and its funds are not yours. It’s crucial to maintain clear boundaries between your personal and company finances to avoid potential issues with HMRC.
2. Consider the total tax cost: Before deciding whether operating as a limited company is the best option for you, carefully evaluate the total tax cost for both you and the company. This can be a complex calculation that requires a good understanding of tax laws.
3. Taking money out of your company. If you take money out of your company, it will typically be paid as either salary or dividends. It’s important to have a solid understanding of tax and company law to ensure you handle these transactions correctly.
4. Be aware of special rules for personal service companies: If you have a company through which you provide services to your clients or customers, you may come within special rules for personal service companies (often referred to as ‘IR35’). These provisions defeat any tax advantages of trading as a company, as compared to being a direct employee of the organisation you are working for.  You may also be affected by the Agency legislation and Managed Service Company rules. This is a complex area where you should take professional advice.
5. Be cautious of tax avoidance: While companies can sometimes be used to arrange your affairs in a way that minimises your tax liability, it’s important to be aware that HMRC may challenge such arrangements.
6. Understand the admin requirements: Keeping records for a limited company can be more complex than for a partnership or sole trader. Annual accounts must be prepared in a specific format and submitted to Companies House, and a Corporation Tax return must be completed for the company, with tax paid on its profits.
7. Manage your payroll responsibilities: As a director of your own company, you’ll need to operate a payroll and ensure that Income Tax and National Insurance are paid on directors’ salaries and fees. You’ll also need to consider issues such as the private use of company cars and other non-cash benefits and ensure that  returns to HMRC are made on time to avoid fines for late submissions.

In summary, operating as a limited company can offer benefits, but it’s important to understand the legal, financial, and tax implications involved. Seeking professional advice is highly recommended to ensure you comply with all relevant regulations and can manage your company effectively.