So, you’ve decided to embark on your journey as a freelancer. It’s no longer a side hustle; it’s your permanent job. And you need to make things a little more official and ensure you’ve got your taxes in check. You have a choice here: you can become a sole trader, or a limited company. For the sake of this article, we’re going to assume you’ve decided to become a limited company – but if you are struggling to make the choice, check out this page on Gov.uk – we’re sure you’ll find it helpful!
What is a limited company and why should you become one?
Simply put, a limited company ensures separation between the company directors and shareholders to the business. This means your business has a legal identity and you are not personally liable for any debts or liability of the company. Essentially, they have limited liability. But it comes with additional paperwork and responsibilities – and they’re a little more time consuming to run, versus being a sole trader.
Aside from the liabilities, there are other benefits to becoming a limited company, including:
- Tax-efficiencies as you pay Corporation Tax through the business and pay your salary as dividends – which might work out to be more tax-efficient (when compared to being a sole trader).
- The appearance of being more professional. Although we know you will be the same person whether you’re a sole trader or a limited company – being a limited company can give the appearance that you’re more professional (which sometimes makes it easier to gain work or secure suppliers).
However, there are down sides associated with being a limited company, including:
- The time spent running the company (there’s a lot more admin to keep up with when you’re running a limited company!)
- You have to keep accurate records and make sure your accounts are in check – which might mean you need to hire an accountant – another cost on top of the £12 fee to set up the limited company!
- There are no secrets! As a limited company you must publish your company information (including directors and earnings) to Companies House – which are publicly available on the world wide web.
Setting up a limited company
Step 1: Choosing a name
Once you’ve decided on becoming a limited company, you have to complete your first very important task: choosing your company name. No two limited companies can have the same name – so you’ll have to get your creative hat on. You can check if the name you want is available by using this tool on the Companies House website. Other things you should bear in mind when choosing your company name are:
- There are certain words you can’t use in your company name – you can see a list of them here.
- You’ll probably want to make sure you can get the domain name (website address) for this company too, you can check if it’s available by using domain checker tools from most popular hosting providers (such as GoDaddy, 123 Reg or Heart Internet)
Step 2: Choose your directors and shareholders
A limited company needs at least one director – but you can have more than one (you can actually have as many as you want!) But assigning directors for your company is a serious decision, and the directors themselves will have to commit to certain responsibilities too. These responsibilities include:
- Following the company’s rules, as shown in its articles of association
- Keep company records and report changes
- File your accounts and your Company Tax Return
- Tell other shareholders if you might personally benefit from a transaction the company makes
- Pay Corporation Tax.
Limited companies also have to have at least one shareholder. This person can be a director of your company as well. If there is more than one shareholder of a business, they’d typically vote and agree changes to the company – but of course, if you’re 100% shareholder, all the rights lie with you.
Person of significant control
The final type of person you’ll need to identify when creating a limited company is “people of significant control”. People of significant control typically have more than 25% shares in a company, more than 25% of the voting rights in a company, or the right to appoint or remove the majority of the board of directors. If you’re the sole shareholder of the company – you’ll also be the person of significant control.
Step 3: Prepare documents on how to run your company
As a limited company you’ll need to prepare a ‘memorandum of association’ and ‘articles of association’. These documents highlight how you’re going to run your company:
- The memorandum of association is the legal document your shareholders sign – agreeing to form the company
- The articles of association are written rules about how you’re going to run the company – don’t worry, there’s some great templates on Companies House here.
Step 4: Knowing the records you need to keep
As a limited company you have to keep two types of records: records about the company and financial/accounting records. Keeping account records is very important – if you don’t do it you could be fined £3,000 or disqualified as a company director!
Records about the company
The details you need to keep about the company are:
- directors, shareholders and company secretaries
- the results of any shareholder votes and resolutions
- promises for the company to repay loans at a specific date in the future (‘debentures’) and who they must be paid back to
- promises the company makes for payments if something goes wrong and it’s the company’s fault (‘indemnities’)
- transactions when someone buys shares in the company
- loans or mortgages secured against the company’s assets
Accounting records you must keep
You also have to keep accounting records, including:
- all money received and spent by the company, including grants and payments from coronavirus support schemes
- details of assets owned by the company
- debts the company owes or is owed
- stock the company owns at the end of the financial year
- the stocktakings you used to work out the stock figure
- all goods bought and sold
- who you bought and sold them to and from (unless you run a retail business)
- all money spent by the company, for example receipts, petty cash books, orders and delivery notes
- all money received by the company, for example invoices, contracts, sales books and till rolls
- any other relevant documents, for example bank statements and correspondence
You have to keep these records for 6 years.
Step 5: Register your company
We’re nearly there – you’re nearly ready to go! The last step is registering an official address and choosing a SIC code – which identifies what your company does. Remember, your company address must be:
- A physical address in the UK
- In the same country your company is registered in, for example, a company registered in Scotland must have a registered address in Scotland
If you don’t want your home address to be publicly available, you can choose to:
- Use a different address, such as the address of the person who will manage your Corporation Tax (you’ve got to get their permission first!)
- Appoint an agent who will give you an address to use.
Then Hey Presto! You’re done. You’re officially a limited company and you’re ready to take the world by storm – or your L&D clients at the very least! If you need any more guidance about being a freelancer, get in touch – we’re always here to help you.