Forming a limited company can be a positive step for your business. It provides you with limited liability, tax efficiency and a professional image. However, the finances, accounts and taxes of a limited company require a somewhat different management approach than those of an individual. Below are a few things you need to watch out for when you decide to incorporate.
Separation of finances
Limited companies are legal entities in their own right, meaning that the owner’s and the company’s finances must be kept separate.
If you need to move money from your company’s account to your private account, you can do so legitimately by paying yourself a salary, making use of expenses or paying yourself a dividend.
Operating a limited company entails accounting for income and expenditure, and done well, the company you own should make profits (where income is more than the expenditure). Any profits that are made will be subject to Corporation Tax nine months after the end of each financial year. To prevent a nasty shock when the bill arrives, put 20% of your monthly sales into a separate account. Corporation Tax is payable on all your profits so it’s best to be prepared.
Some good news: Corporation tax is set to decrease to 17% by 2020.
Once your company earns, or is expected to earn, above the relevant VAT threshold (currently £83,000), your limited company will need to register for VAT with HMRC and then complete and submit periodic returns. These must be submitted even if you do not owe any VAT. If you do not keep up to date with these returns you may have to pay a fine.
Even if you are the only employee in your limited company, you still need to register a PAYE payroll scheme with HMRC and notify them every time you pay yourself. If you pay for your personal expenses through the company, you must reimburse these expenses or you could be taxed.
Once you have set up a payroll, you need to notify HMRC whenever you make payments, and submit an Employer Payment Summary for periods with no payments. As with VAT returns, you will receive a fine if you do not keep up to date with these payroll returns (called “real time information” or RTI returns).
Operating through a limited company may mean more admin, but the professional and financial gains make it worth it. It can get quite complicated when trying to do this on your own and having a professional to help you get incorporated is the best way to avoid trouble.