To make an informed decision about the type of vehicle that would work best for you, you need to be aware of the legal responsibilities and obligations that each will impose on you.
In the second of two articles on this subject Mark Glenister explains what you need to think about if considering setting up as a limited company.
To view the first article – which considers operating as a sole trader or through a partnership – please click here.
Limited liability companies
A limited liability company is viewed in law as being separate from the people who own and manage it, which means that in most cases it is the company, not you personally, who will owe any business debts and be chased for them if they are not paid. If the company fails, the directors’ liability will usually be limited to the value of your initial investment – unless you have done something seriously wrong, such as behaving dishonestly or trading when you knew or ought to have known you were insolvent.
Trading through a company is, however, more complicated than using other business vehicles because of the need for more agreements to govern how the company will operate, restrictions on your ability to make decisions without running them past other people involved in the company first, and significant financial and general reporting requirements. Businesses who want to trade as a company need to register with Companies House and submit accounts for scrutiny every year. Failure to submit accounts on time and pay any tax due can result in significant financial penalties.
A limited liability company has shareholders, who may or may not also be directors. It is possible to be the sole director and shareholder of a limited liability company or to be one of many shareholders and directors, depending on how the business is structured. The ease with which decisions can be made will depend on how many people need to be involved in the decision-making process.
Documents required for a limited company
When you register a company with Companies House, you have to provide a memorandum of association which is signed by all shareholders agreeing to form the company, together with articles of association which provide the written rules about how the company is to be run, as agreed by the directors, the shareholders and the company secretary. There is also likely to be a shareholders’ agreement, which deals with ownership of the shares, the way the company is managed and run and the relationship between the shareholders. There are important differences between the documents, so it is prudent to take legal advice on the contents of each to ensure that you set up your business in the way that is most appropriate for your specific needs.
Tax considerations
A limited liability company is required to pay corporation tax. When you form your company, you will need to set your accounting period for the purpose of paying this tax (an accounting period cannot be longer than 12 months). The first set of accounts are due 21 months after the date you registered with Companies House and annual accounts are due 9 months after your company’s financial year ends. It is possible to change your company’s year-end for tax purposes by shortening it as many times as you like and lengthening it to a maximum of 18 months. For example, there may be cashflow advantages to change the dates when tax is payable if your business is seasonal. If you are a retailer wanting to secure finance, you may want to end the year with the strongest set of accounts possible, so after Christmas may be the best time.
Preparing for the future
Whether you decide to trade through a limited company, or some other vehicle, you need to think about what you want to happen to the business in the future should you wish to leave or retire or perhaps sell it on as a going concern. To maximise the value of your business, you need to make sure it is in good shape and it is important to start as you mean to go on. Choose investors wisely, file accounts on time if you need to, and always conduct your business with an eye on an eventual sale. This will make the process of stepping away from things much easier when the time comes.
JPP is a passionate supporter of start-up businesses and can offer advice and guidance on business structure, funding, legal documents, including shareholders agreements, and intellectual property rights often at a packaged fixed price.
