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What is a limited company?

July 5, 2021
Whether you're changing from a sole trader to a limited company or are establishing a new company or startup, it's important to know the key facts about limited companies, including the legal stuff, your tax obligations, and how to prepare accounts for HMRC.There's a lot to take in when it comes to limited companies, but once you've grasped the basics of filing a Company Tax Return and submitting annual statutory accounts, the whole process becomes a lot clearer. The key thing is to stay on top of your financial reports and accounts, not just for HMRC, but to track the financial health of your business.Running a limited company comes with several work perks, from reduced financial liability and lower rates of tax (companies pay a flat rate of 19% Corporation Tax rate, compared to sole traders or partners, who can pay up to 45% income tax), to tax reliefs and flexibility.In this article, we'll cover exactly what a limited company business structure is, bust the jargon around accounting periods and financial years, and explain when to pay VAT and Corporation Tax. If you decide that you want to form your own limited company, Ember will handle the whole company formation process for you.

What is a limited company?

A limited company is a business that is legally separate from the people who own and run it: its shareholders and directors. As the company is recognised as a distinct legal entity accountable for its own finances and business actions, the business owners have limited liability for any business debts and losses incurred, meaning that their personal finances are safe if the business fails. The company's shareholders usually receive a share of profits in the form of dividends.As the company director, you'd only be liable for its debts if:
    you personally 'guaranteed' any of the business's loans, meaning that you promised to sell your personal assets or use your own money to settle unpaid debtsyou committed fraudyou sold company assets for below market value (or gave them away for free) when they could have been sold to repay creditors

How does a limited company work?

Your business's legal status as a limited company means that it can:
    enter into contracts in its own nameemploy staffsue and be sued (if someone initiates a lawsuit against a limited company, they have to sue the company itself rather than its shareholders or directors, which protects you against financial loss)
Your company's limited company structure also means that if the business becomes insolvent (falls into financial difficulty) and can't pay its creditors, you won't be financially responsible.Instead, your company can be 'wound up' (liquidated), which is a form of bankruptcy for businesses, where – after assets have been sold to pay off creditors as much as possible – all remaining debts are written off, and your business is struck off the register at Companies House.Once you've registered your limited company, you'll receive a certificate of incorporation. This document proves that you've set up your company correctly and that it is a separate legal entity from you: the shareholder and/or director.

Who owns a limited company?

When it comes to the most common form of a limited company in the UK: 'limited by shares', shareholders are the owners.Shareholders nominate directors to manage the operations, finances and administration of their limited company, from paying tax to running payroll. Shareholders can also nominate themselves as directors.You don't have to run a vast business empire with multiple shareholders to own a limited company. Often, limited companies start as self-employed one-man bands, with a single shareholder (who owns 100% of the shares) and who is also the director.Anyone who owns more than 25% of shares, 25% of voting rights, or has the right to appoint or remove directors in your company must be recorded on the People with Significant Control (PSC) register at Companies House, which keeps track of who owns and controls limited companies. While shareholders own a limited company, the business's separate, legal identity means that shareholders have no financial liability for the company beyond the 'nominal value' of their shares. This means they won't have to pay any money beyond this value if the company fails. The nominal value is an amount of money assigned to a share – usually very low, around £1 – when a shareholder takes ownership of it. This amount is purely for accounting and records purposes and is unconnected to the real, market value of a share (which is how much it would go for if sold on the market).When a company is incorporated, shares get allotted to each shareholder (this is called issuing share capital). The nominal value of all the company's shares represents its total share capital. For example, if your company issues 100 shares at £1 each, it has a share capital of £100. If the company is forced to close, each shareholder will have to pay the nominal value of the shares they own. In this case, you have four shareholders who each own a quarter of the company's shares, they can expect to pay £25 each if the company is liquidated. As your company's share capital does not reflect its actual, market worth, the nominal value of the business's shares is what gives you limited financial liability when it comes to the company's debts and losses. Again, you're unlikely to pay more than a few pounds in share capital if the company is liquidated.

Paying tax as a limited company

Corporation Tax

While sole traders and partners pay Income Tax, limited companies have to pay Corporation Tax on their profits. The Corporation Tax rate is currently 19%, which means that if your company made a profit of £75,000, you'd have to pay a £14,250 Corporation Tax bill. You're allowed to deduct the cost of certain products and services you buy for your business, as well as bills you have to pay, from the total amount of your company's profit. This means that you'll have less profit to report, and therefore less Corporation Tax to pay. The costs you're allowed to deduct are called 'allowable expenses' and include: 
    salaries and staff expensesrent and utility bills for business premises stationery and office equipment advertising and marketing costs legal fees (if incurred through your ordinary trading activities) and accountancy costs 
With Ember, you can easily categorize your expenses, saving you hours of laborious calculations. Using our app, you can enter a transaction as, for example, 'client entertainment' or 'office stationery', and our system will immediately sort it as an allowable or disallowable expense, adding back or deducting its value from your tax bill.With our real-time view of your estimated Corporation Tax bill, you'll always know exactly how much money to ringfence for tax, avoiding any annoying surprises when your tax is due.  

When is Corporation Tax due? 

Most limited companies have a deadline of nine months and one day after the end of their Corporation Tax period (see our section 'accounting periods for limited companies') to pay their tax bill.However, your Company Tax Return – which you use to detail the amount of Corporation Tax you owe - is due 12 months after the end of your accounting period for Corporation Tax. 
Corporation Tax after April 2023 
From the first of April 2023, you'll be taxed 25% on any profits between £50,000 and £250,000. Profits up to £50,000 will still be taxed at 19%. If your company made a profit of £75,000 after April 2023, you would pay: 
    £9,500 in Corporation Tax on the first £50,000 (19%) £6,250 in Corporation Tax the remaining £25,000 (25%) 
This would give you a total Corporation Tax bill of £15,750. 

Accounting periods for limited companies

When it comes to limited companies, there are two key periods that define how you report and pay tax. These are your: 
    Corporation Tax Period (also referred to as your 'accounting period for Corporation Tax'). You have to submit your Company Tax Return and calculate your Corporation Tax bill according to this period, which can't be longer than 12 months. The amount of profit you make as a business in each Corporation Tax Period is what determines how much Corporation Tax you pay.accounting period for filing annual statutory accounts (also called your 'financial year'). You have to submit yearly accounts (which report the financial state of your business) to Companies House for this period. 
Your accounting period for annual statutory accounts usually covers 12 months, and you can make this the same 12 months as your Corporation Tax Period, simplifying the submission of your statutory accounts and Company Tax Return.However, your accounting period for annual statutory accounts may sometimes be longer than 12 months (whereas your Corporation Tax Period can't go over 12 months). In your company's first year of business, your accounting period for filing annual accounts will run from the date of your company's incorporation to the final day of the month of your company's incorporation the following year. This is called your Accounting Reference Date. For example, if your company was incorporated on the 15th April 2021, your Accounting Reference Date would be the 30th April 2022, because that is the last day of the month in which your company was incorporated. This makes your first accounting period for statutory accounts 12 months and 15 days. In this situation, as your Corporation Tax Period can't run for longer than 12 months at a time, you will have to submit two Company Tax Returns. One which covers the 12 months of your accounting period for filing annual statutory accounts, and one which covers the extra 15 days. After your first year of business, your accounting period for filing annual statutory accounts will usually run for the standard 12 months – in this case, from the 1st May 2022 to the 30th April 2023. If you do decide to lengthen this period (you're allowed to extend your financial year up to 18 months every 5 years), you'll have to submit more than one Company Tax Return to cover the whole timeframe. 

Tax obligations for directors of limited companies

If you're the director of a limited company, you may need to submit a Self Assessment tax return if: 
    you're repaying a student loan that isn't taken out through PAYE you're receiving interest through shares or getting paid in dividends  HMRC has sent you a notice to send a tax return. If you don't think you need to send a return (for example, because all your income is taxed through PAYE), get in touch with HMRC and ask them to withdraw the notice, otherwise, you could be penalised for not filing, even if you don't owe tax 
If you receive any income which isn't taxed at source (deducted from your salary and given to HMRC before you're paid), this usually means you have to send a Self Assessment tax return. However, if you're a director whose only income is taxed through PAYE at your limited company, HMRC has agreed that you do not need to file a return. Ember can prepare and file the Self Assessment tax return for the director of your limited company, saving you the hassle of dealing with HMRC and letting you get on with running your business. 

Business rates

If your limited company uses a non-domestic property (such as an office) for its business activities, you may be charged a form of tax called business rates. Non-domestic properties including: 
    shopspubs offices factories and warehouses holiday homes (available for let more than 140 days or more each year) bed and breakfast accommodation 
are usually subject to business rates. The amount you have to pay depends on your local authority, which charges you on the value of any building or part of a building that you use for business purposes. 

Value-added tax (VAT)

If your limited company made over £85,000 in VAT taxable sales (products or services you've sold which aren't VAT-exempt) in the last 12 months, you'll need to register for VAT. VAT is a flat-rate, 20% tax which you have to charge customers on most things they buy, and then pay to HMRC. If you know your business will exceed the £85,000 threshold in the next 30 days, you'll also need to register for VAT. Cash flow can be unpredictable when running your own company. If your business only temporarily breaches the £85,000 VAT limit and you know it'll remain under the deregistration threshold for the next 12 months, you can contact HMRC to request a registration exemption, to save you from paying VAT. You have to submit all your VAT returns and payments online, due to the government's new Making Tax Digital (MTD) scheme. Unless you're exempt from MTD, for example, due to religion or disability, you have to use third-party software to file your return.Ember – one of the government's MTD-approved software – will calculate all your VAT charges and transactions on your behalf, submitting returns seamlessly to HMRC. We couple smart automation with human expertise, so you'll always have the advice of a real-life, qualified accountant on tap. 

PAYE and National Insurance contributions

If you plan on employing anyone in your company, you have to pay taxes and National Insurance on their behalf through payroll. You'll also need to register as an employer with HMRC.As well as deducting your employees' taxes and National Insurance, you have to record their pay, and submit all information on wages, tax and National Insurance, student loan repayments, and pensions to HMRC in what's called a Full Payment Submission (FPS). The government has also brought in a Real-Time Information (RTI) scheme, which means that you have to report to HMRC every time an employee is paid, not just on an annual basis. Ember helps you run every aspect of payroll, including submitting RTI on employees' pay to HMRC, producing P45s and P60s, and displaying PAYE, National Insurance contributions, and pensions in one central feed. Our handy reminders will keep you to date with your payroll obligations, and make sure you report to HMRC on time, every time. 

Company Tax Returns and annual statutory accounts 

When it comes to running a limited company, your Company Tax Return and your annual statutory accounts are some of the most vital documents you'll use and submit, so it's important to get them right.

Company Tax Return  

As we covered earlier, your company tax return details the amount of Corporation Tax you owe for your Corporation Tax period (also called your 'accounting period for Corporation Tax'). 
How to submit your Company Tax Return
To submit your Company Tax Return, you'll need your company's annual accounts and taxable profit. Taxable profit is the amount of profit your company has made in its Corporation Tax Period that can be taxed, after excluding any allowable losses – financial losses that you're allowed to remove from the profits you report – and tax-deductible expenses.You'll also need a Government Gateway user ID and password, and your Companies House password and authentication code (if you're submitting your Company Tax Return and annual statutory accounts in one go). Your Company Tax Return contains what's called a CT600 form. This form will ask you standard questions about your company, the Corporation Tax period the return covers, and your business's turnover, profits (excluding allowable deductions), and losses. The form can seem quite long (11 pages), but there's no need to feel daunted, as you should have all the information to hand as long as your company has kept careful accounts. Ember's team of expert accountants will prepare your Company Tax Return at the end of your company's financial year, saving you the stress of complex calculations and letting you get on with running your business. Our real-time tax view also gives you constant access to your estimated end-of-year Corporation Tax bill, so you always know where you stand with the taxman. Our clever system automatically calculates your add-backs (expenses that aren't tax-deductible) and tax deductions, so you know exactly how much you'll owe to HMRC, and how much money to set aside. We'll send you useful tax notifications ahead of time, so you're aware of your obligations ahead of time. 

Annual statutory accounts 

At the end of your financial year, your limited company has to submit annual statutory accounts to Companies House, which are prepared from your company's financial and accounting records. 
Financial records 
Financial records are key documents that you have to keep about your business. They should include information about the administration and finances of your company, as well as details of decisions made and meetings held. Your financial records must include: 
    shareholder votes and resolutions 'debentures': promises that the company has made to repay any debts it is owed, and details of the date it must be paid by (debentures aren't secured by collateral: assets which you offer up if the debt can't be paid)'indemnities': payments and compensation the company promises to make for damages and lossshares bought in the company secured loans or mortgages (these are debts which the company has promised to sell its assets to repay if it can't afford the debt)Register of members (if your company is a company limited by shares, these are your shareholders, and if your company is limited by guarantee, your guarantors)Register of directors and their residential addresses Register of secretaries Register of People with Significant Control (PSC) Minutes from board meetings and shareholders' meetings (minutes are notes which record what was said, decisions made, and motions voted on company meetings, to give an accurate reflection of what occurred within them). 
Accounting records
Accounting records are documents that detail the money your company has spent and received in sales, the money your business owes and is owed, the worth of your shares, and your company's assets. You must keep accounting records of: 
    the money you are owed as a limited company, for example, invoices sent to clients, and the date when you expect to be paid (a sales ledger)the money you owe as a limited company (a purchase ledger)all the purchases you've made as a business (a cash book)small expenses for your workplace, for example, milk and tea for employees and stationery, which you've drawn from your business accounts (petty cash account)fixed assets. These are assets that you've purchased for the maintenance and long-term running of your company, such as machinery and equipment, which aren't likely to generate cash in the short term. mileage log. If you drive at all as part of your business activities, you can claim back 45p per mile for the first 10,000 miles you travel, and 25p for each mile after that. Your mileage log should include details like the date of your journey, destination, number of miles, and purpose of the journey. 
What to include in annual statutory accounts
Using the information from both your accounting and financial records, you'll need to make up statutory accounts which include: 
    a 'balance sheet'. This is a document that shows the full value of everything your business owns (for example, stocks, assets, cash), as well as the money it's owed by debtors, and how much money the company owes itself. The director of your company must put their name on the balance sheet and sign it. a 'profit and loss account. This shows how much profit the company has made over its financial year, by taking the business's allowable expenses and costs from its total sales. a 'cashflow statement'. This document shows the money that's going in and coming out of your company. Cashflow statements are a useful way to gauge your business's financial health, as you can immediately see whether your expenses outweigh your income. 
You'll have to file your annual statutory accounts with Companies House nine months after the end of your financial year (which is your Accounting Reference Date). Ember can prepare and file your end of year accounts on your behalf, ensuring that you never miss a deadline. 

Forming a limited company

Whether you're a one-man-band, a close-knit partnership, or a growing empire, Ember can register your limited company, and get you incorporated in just a couple of clicks. You'll get your legal company documents – from articles of association to certificate of incorporation – all in one place. We also cover your £12 incorporation fee, approve your new business name, and offer a free one-month trial at Ember, helping you access all your business accounting needs in one easy, intuitive solution. As well as organising your memorandum of association and articles of association (the documents you need to start your limited company), we'll also cover your statement of capital. This is the official form that shows the shares you issue for your company. Our incorporation tool will register your business as a limited company if you're a single director and shareholder. If you want to register a company with more than one director or shareholder, jump in a chat with one of our qualified accountants, who can help you through the process.