Limited Companies – the facts
Don’t like risk? A limited company might be the ideal choice for your private practice.
When you set up a limited company, you can become a director, a shareholder, a company secretary and an employee, all in one go!
What is a limited company?
A limited company is an incorporated entity. This means that it has been registered with Companies House (incorporated) and has its own legal identity. There are various types of limited company, but the one you need to know about for your private practice is a private limited company.
A private limited company is split up into shares. You could own all the shares, or you can divide them up - it’s your decision. As an employee, you will pay yourself a salary and will receive dividends based on your share ownership.
There are lots of GREAT things about private limited companies...
- unlike sole traders, with a limited company your personal liability is limited by law. This may remove some of the financial risk
- limited companies find it easier to secure funding from banks and private investors than sole traders
- your business name will be protected by law, as you have to register it at Companies House (unlike a sole trader)
- a limited company is usually seen as more professional than a sole trader
- owners of private limited companies can often pay less tax than sole traders
Pay less tax, you say?
If you are a sole trader, you will have to pay income tax and national insurance on all of your profit. With a private limited company, you can choose what salary to pay yourself, in addition to the dividends that you will receive as a shareholder. This means that, depending on your salary, you may pay significantly less income tax. You may also pay less NICs, as there are no NICs on dividends.
Bear in mind however, that a private limited company is also subject to corporation tax and capital gains tax, and the business will also have to pay national insurance separately. A limited company can also be difficult to close down.
Confused? Seek advice from an accountant. They will be able to help you decide on the best option for your private practice.
Convinced? Here’s what you need to do...
- register and incorporate your business with Companies House
- send annual accounts to Companies House detailing specific financial information - there are penalties if you file your accounts late!
- inform HMRC if your company is liable for Corporation Tax
- file a Company Tax Return on time
- pay Corporation Tax within nine months of the year end
- as a Director, file your Self-Assessment Tax Return and pay any tax owed on time
- register for VAT if your turnover is over £85,000 in the tax year 2019/20
Remember: all of the above is not as difficult as it may sound with the help of a good accountant.
- visit the HMRC website - it contains lots of useful information about Corporation Tax and registering a private limited company
- read our guide about finding an accountant who will be able to give you the advice you need
- read our articles on becoming a sole trader or a partnership to help you make your decision about business structure