What are the legal requirements of a Limited Company?
A Limited Company must have at least one director and a registered office. Previously under the Companies Act 2006 it was necessary to appoint a Company Secretary, but this requirement was removed with effect from 6 April 2008. You as director of your own Limited Company may determine the ownership in terms of the allocation of shares in the Company. Usually 100 per cent of the shares would be issued to you as the Managing Director.
The Registered Office of a Limited Company is the official place of residence of the Company. This must be within the jurisdiction in which the Company was incorporated; for a Company formed in England or Wales the registered office must be in England or Wales and for a Company formed in Scotland the office must be in Scotland. A Registered Office will usually be an Accountant’s office, your own office premises or your home office. If using your own home office it is wise to check that there are no restrictions to using commercial operations in the terms of any lease or mortgage agreement. A plaque or sign must be displayed outside the building to show that this is the Company Registered Office.
A Limited Company must file annual accounts and an annual return with Companies House. The return confirms who owns and who runs the Company. The Company must also file a Corporation Tax Return with HM Revenue & Customs (HMRC). Failure to file returns will result in penalty charges from HMRC.
Businesses with a turnover of more than £85,000 (from 1 April 2018) must be VAT registered.
Do I need a Limited Company or can I be a self-employed sole trader?
Technically, you do not need to set up a Limited Company to be a freelance contractor. You can work self-employed as a proprietor or sole trader of your own business, as a partner in a business, as an employee of an “umbrella” company or as a PAYE employee to an agent.
If your clients and agents are prepared to engage you on the basis of a self-employed sole trader then you may work in this way. However engagers are reluctant to as in the event that your tax status is challenged by HMRC the client becomes liable for PAYE tax and National Insurance Contributions (NIC) due. Furthermore, if an Agency is involved, s44 Income Tax (Earnings and Pensions) Act 2003 prevents individuals from being self-employed as the Agency is required to treat the individual as if they were an employee and deduct PAYE and NIC from payments made to the individual. It is important to note that no-one can determine their own status for tax and NIC purposes. Status is determined by the nature of the engagement i.e. contractual terms and working practices.
A Limited Company offers the owners (i.e. the shareholders) protection against liability for the Company’s debts. If the Company were to become insolvent as a shareholder you would lose only the value of your shares. As a director you would not be liable for the Company debts unless it could be proved that you had acted fraudulently or improperly under company law. However, HMRC is likely to pursue directors for any outstanding tax liabilities especially those in respect of PAYE deductions from salaries paid to directors (Regulation 42 Determination).
There is no reason why you cannot operate as self-employed or within a partnership other than that you will be restricted to finding clients directly. An alternative form of Company, introduced in April 2001 is a Limited Liability Partnership (LLP).
How do I set up a Limited Company?
A Limited Company can be formed with the help of a company formation bureau for a charge. You can deal with this purchase direct through the bureau or instruct an accountant to deal with this on your behalf. Once you have formed the company, the name and the Articles of Association can be very easily modified to your requirements. A company usually costs between £100 and £150 through a company formation bureau. You will need to notify Registrars at Companies House of any changes to the company, including the Company name, the directors, the Company Secretary (if appropriate) and the Registered Office. The notification must be done on the correct forms.
Alternatively you can incorporate the Company yourself. This is a fairly straightforward procedure and can be quite a more cost effective option than using a third party formation service.
What are the duties of a director of a Limited Company?
The post of director has a number of responsibilities and requirements. This includes to ensure that the Company is run properly, according to the law and in the interests of the shareholders. A leaflet produced by Companies House GBA1 explains the basics about being a director of a Company.
You can find out more about this in the guidance booklets available via the Companies House website.
Am I an employee of my Company?
As a director of a Limited Company you are not an employee of that Company unless you have a contract of employment. However, for tax and National Insurance purposes you are an officer of the Company and treated as an employee.
If a contract is in place this will specify the expected duties, salary, benefits, holiday entitlement in the same way as any other employment contract you might have held. With an employment contract in place you will have to bear in mind the knock on effects of responsibilities under the National Minimum Wage/National Living Wage and other statutory employment benefits.
If you are to set up formal contracts of employment with your Company, we strongly recommend that you seek employment law specialist advice.
What is a Limited Company able to do?
A Limited Company is a legal entity in its own right. You as a director and the Company are seen as separate persons under Company law. A Limited Company can own property or equipment such as computers. The Company should have its own business bank account, accounts with suppliers and can hold shares in other companies.