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Shall I Set Up a Limited Company?

Objective:

 

  • Understand different legal structures
  • The advantage of different legal structures
  • The disadvantage of different legal structures
  • How to set up limited company
  • Tax requirements for different legal structures
  • Director’s responsibilities

Overview:

The activity is designed to assist the entrepreneur to understanding different legal structures and its advantages and disadvantages. It covers how to set up limited company and tax requirements of the different legal structures and director’s responsibilities.

Activity:

  1. Ask learners to introduce themselves and their business idea, their knowledge around legal structures and what they want to achieve from the workshop/session.

  1. Set the aim/objective of the session

  1. Introduce different legal structures

  • Sole Trader
  • Partnership
  • Limited Company
  • Limited Liability Partnership (LLP)
  • Community Interest Company (CIC)

  1. Discuss the advantage and disadvantage of each of those legal structures

 

Sole Trader

Advantage

  • Complete control
  • Make all the decisions
  • Take all the profits
  • Can hire employee and give them managerial roles
  • Low cost
  • Formalities are minimal
  • No accounting or business audits are necessary – but need to complete self-assessment
  • Class 2 & Class 4 NI (percentage of net profits)

Disadvantage

  • Unlimited liability for debts
  • Difficult to obtain capital
  • Difficult to survive if you become unable to work or trade
  • Limited capacity for growth
  • Fewer welfare benefits than an employee

Partnership

Advantage

  • Partners in the business share all the risks, costs and responsibility as well as the profits
  • Each partner needs to register as self-employed
  • Class 2 NI
    Class 4 on each partner’s share of the partnership profits
  • Partnership agreement is recommended (share of profits and roles)
  • Share skills and knowledge and responsibility
  • More likely to survive and continue trading if one of the partners leaves, become incapacitated or dies
  • Day to day management can be made easier by the allocation of roes to specific partners
  • Greater success might arise through the combination of abilities and talents than be achieved
  • More capital may be available to invest in the business
  • Easier to spend time away from the business

Disadvantage

  • Unlimited liability for business debts
  • Disagreement between partners can lead to dissolution of the partnership
  • All partners can be held responsible for any one partner’s negligence. This is important because individual partners have the freedom to act on behalf of the partnership as a whole.
  • No legal documents are mandatory
  • No legal existence

Limited Company

Advantage

  • Treated as a separate entity from its owners
  • Company’s finance is distinct from personal finance
  • Certain tax benefit
  • Liability for debts is limited
  • Capital can be raised by issuing shares
  • Easier to raise finance
  • A board of directors and a management team control the business
  • Director will pay Class 1 NI as an employee of the company
  • Corporation tax
  • Business is perceived as being more ‘professional’

Disadvantage

  • The cost of administration – Memorandum & Articles of Association
  • Stringent accounting and audit requirements

Limited Liability Partnership (LLP)

 

  • A hybrid of a partnership and a limited company
  • Each partner’s liability is limited to the money they have invested in the business and the amount of personal guarantees they have given to raise finance.
  • At least two of the partners must be ‘designated members’, which means they have extra responsibilities
  • Must register at Companies House
  • File annual returns

CIC – community Interest Company

 

  • Limited company by share or by guarantee
  • Trade commercially as a social enterprise
  • Has a clear social objective
  • Must be registered with CIC Regulator
  • Restrictions on the distribution of profits to shareholders – asset lock
  • The dividend that may be paid to shareholders is capped at a rate set by the CIC Regulator

  1. What do we need to set up limited company?

 

  • A company name
  • An address for the company
  • At least one director
  • At least one shareholder
  • The agreement of all initial shareholders (‘subscribers’) to create the company – known as a ‘memorandum of association’
  • Details of the company’s shares and the rights attached to them – known as a ‘statement of shares’
  • Written rules about how the company is run – known as ‘articles of association’

  1. How to set up limited company?

 

  1. Tax as a sole trader, partnership or LLP

  • Income Tax on profits in the business over your personal allowance
  • Not dependant on how much you draw out of the business
  • Allowable costs differ to limited companies
  • National Insurance, class 2 and 4 is payable over the thresholds

  1. Tax in a limited company or CIC

  • Corporation Tax on profits of the company
  • Allowable costs differ to sole traders/partnerships
  • Choice of remuneration – salary and/or dividends and also choice of timing can mitigate tax
  • Income tax and NI on salary taken over NI thresholds and personal allowance
  • Preserving your state pension through salary
  • Taxable benefits
  • Dividends and income tax
  • Changes in dividend tax rates for next tax year

  1. VAT

 

  • Applies to all types of business structures
  • Must register when your turnover for the year exceeds £82,000
  • May be beneficial to consider voluntarily registering depending on what you sell, who you sell it to and what your expenses are
  • Number of different VAT schemes available to reduce administration burden

10. Accounts Case Studies

 

  • Dr Leah Limited
  • 2013 Apprentice winner Dr Leah Totton’s business. Lord Sugar invested £250,000
  • Abbreviated accounts filed at Companies House show what the public get to see
  • Did she make Lord Sugar happy?! Did her company make a profit or a loss?
  • Changes to UK Accounting standards – how your accounts will look in the future

 

11. Director’s Responsibility

 

  • Keep company records
  • Prepare financial statements that show a true and fair view of the business
  • Maintaining statutory books and registers
  • Making annual returns and company tax return
  • Register for self-assessment

12. Summarise

  • Have we met the workshop aims?
  • How would you score yourself now on your finance and limited company knowledge?
  • What will be your next steps?
  • Questions

Skill Development:

  • Reflection
  • Financial analysis and budgeting
  • Rationalising
  • Decision making

Resources:

 

  • Flip Chart (if presenting in a group)
  • Power point (if presenting in a group)
  • Pens
  • Calculator

References:

  • Cobweb BIF 032 Choosing the Right Business Legal Structure
Author / Attribution

This guide was produced by Yan Miao (Business Adviser - The Women’s Organisation ).