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Learn more about the advantages of an Ltd over the self-employed.
Registering a company in the UK is a very common practice among entrepreneurs who are fed up with restrictive, complicated and unstable law. But setting up a business in the UK is not enough. First, you need to choose the right form of business.
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British law enables the establishment of many different types of business: self-employment, i.e. Self-Employed, private limited liability company, i.e. LTD company, LLP - (Limited Liability Partnership) - limited liability partnership company, PLC (Public Limited Company) - Public with limited liability, Unlimited Company, .Partnership - ordinary partnership, Property Management Company - real estate management company, Company limited by guarantee - limited liability guarantee company, or Franchise - franchise.
However, the most popular, most frequently established companies take the form of the first two: Self-Employed activity and LTD company.
The question remains: which one is more profitable to wear?

Self-employment is the easiest form of business activity to set up, intended for novice entrepreneurs providing simple services that do not require large investments. However, it is definitely more advantageous to set up a Limited Company (Ltd). But why?

Lower premiums
By establishing a ltd company, you can save quite a lot on social security contributions and taxes. This is possible thanks to a provision of British law that is exceptionally favorable from the entrepreneur's point of view. It says that directors and shareholders of a ltd company can pay themselves in two ways: a salary, which can be very small, and according to local law, the lower the salary, the lower the National Insurance Contribution (NIC) rate, and dividends; these, in turn, can be very high, but are not taken into account when calculating the contribution base. Thanks to this, even with high earnings, properly divided between salaries and dividends, the contribution obligation is not onerous.

Lower taxes
Limited companies pay Corporation Tax on their profits at a single rate of 20%. In certain situations, they also have the option of lowering this threshold.
The self-employed pays tax on their income in accordance with the personal tax brackets (the so-called Personal Allowance), which are 20%, 40% and 45% respectively. On income over £32,000, a self-employed person will pay tax at 40%, while a limited company will pay 20%.

No need to be UK resident
Anyone can set up a limited company in England or Scotland, regardless of the country in which they live and where they have a tax residence.
When setting up a self-employd in the UK, a person should have lived there or at least stayed there for more than six months.

Degree of responsibility
The partners of the Ltd company are financially liable only up to the amount of the contribution made. This is an excellent safeguard in the event of bankruptcy of the company, ensuring that the owners and partners will not suddenly become destitute. Such a solution is not possible in the case of self-employed, because here the owner (i.e. a self-employed person) is responsible for the company's obligations with all its assets. In practice, therefore, failure in the business arena can mean very serious trouble in private life.

The degree of responsibility is closely related to the separate subjectivity of the company's shareholders and the company itself. Company's assets are treated by the tax authorities separately from the assets of individual shareholders, while in the case of self-employment, the assets of both the self-employed person and her company are treated as one entity.

Self-employment is appropriate for novice businessmen, providing uncomplicated services at the expense of small outlays for the company. On the other hand, the structure of the ltd company is associated with a wider scope of activity, a larger group of clients and a more serious approach to business, focused on achieving much greater profits. In addition, a British limited company is a recognized and respected structure all over the world, which guarantees it faster and easier acquisition of customers and partners.

Name protection
By registering a ltd company under a specific name, we guarantee its legal protection. This means that no one can start a company with the same or largely similar name anymore. As for self-employment, there is no such restriction. In practice, this may lead to a situation where two or more companies operate under the same name. If one of them turns out to be extremely incompetent, his bad reputation can easily be attributed to another, causing them lo
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How to set up a limited company in the UK

When starting a business, it's common to operate as a sole trader and essentially work for yourself. But as you gain more experience, transitioning to a private limited company may become more advantageous.

While the process of forming a limited company (Ltd) is relatively simple, it's crucial to understand the legal, financial, and other obligations that come with it.

To learn all about private limited companies and the steps to establish one, continue reading below.

What is a limited company?
A limited company is a business formation that operates as an independent legal and financial entity separate from its directors. The key benefit of this structure is limited liability, where the shareholders' personal assets are shielded if the company goes bankrupt or is involved in legal proceedings. The shareholders are only responsible for the nominal value of their shares in the company.
A limited company must have at least one director, maintain dedicated bank accounts, pay corporate taxes, can be traded through the buying and selling of shares, and is required to register with Companies House.
Why set up a limited company?
The primary advantage of setting up a limited company is the limited liability it provides to its directors. The company operates as a distinct legal entity, with its own bank accounts and other financial dealings, which ensures that the directors' liability is restricted to the nominal value of their shareholding. This is a significant advantage over being a sole trader, where personal finances are not fully separated from business finances, and personal assets can be at risk in the event of business failure or legal action.
In addition, limited companies typically pay a lower rate of tax on their profits, making it an attractive option for businesses looking to optimize their tax position.
When should I change from sole trader to limited company?
Sole trading can be an advantageous way to test and refine your business model with minimal administrative costs and no registration fees. As a sole trader, you have the flexibility to make independent decisions without the need for consultations with other directors or shareholders. However, the main disadvantage of sole trading is the personal liability that comes with the business. This means that as the business grows, the risks associated with personal liability also increase. Additionally, sole traders are required to pay income tax on their profits rather than corporation tax.
In contrast, forming a private limited company offers more protection against personal liability, as the company is a separate legal entity with its own assets and liabilities. This legal structure also allows for various funding options, including the ability to obtain private equity funding by selling shares in the business. This flexibility in funding options can be a significant advantage over sole trading, which is generally limited to taking out business loans from banks.
Can I set up a limited company on my own?
It is possible to set up a company where you are the sole employee and only director. Many contractors prefer to operate as companies because it reduces the risk of being classified as employees by clients for tax and legal purposes. Additionally, operating as a company provides contractors with personal liability protection in the event of client lawsuits, which can protect their personal assets.
Alternatively, contractors may choose to operate under an umbrella company, which handles the company administration for them. This can be a more straightforward option for those who do not wish to manage the company's administrative responsibilities.
The 7 steps to setting up a limited company
Here are the steps you need to follow to set up a company:
  1. Determine if a company is the right structure for your business.
  2. Choose a unique name for your company that is not offensive or misleading.
  3. Appoint at least one director who will be responsible for the company's decisions and tax filings. You can also appoint a company secretary, but this is not required.
  4. Decide who will be the shareholders, with at least one required. Shares can be divided among directors and shareholders, and the person with more than 25% of shares is a "person of significant control."
  5. Create the necessary company documents: a memorandum of association and articles of association that outline the company's formation and how it will be run.
  6. Keep accurate records of all details about the company, including its accounting records, for at least six years.
  7. Register your company and its address with Companies House, and choose the correct Standard Industrial Classification (SIC) code that matches the nature of your business. You can also register for corporation tax during this process.
How to register a limited company
You have the option to register your company with Companies House through an online application or by submitting form IN01 via post. If you decide not to include the word "limited" in your company name, you must register via post. Online applications are usually processed within 24 hours, while postal registrations can take up to 10 days. After successful registration, you will receive a Unique Taxpayer Reference (UTR) within a few days via post. It is important to keep this reference number safe. Additionally, you will receive a 'certificate of incorporation', which confirms that your company is legally established, along with the company number and formation date.
How much does it cost to register a company?
To register your company, you can choose between online or postal registration. The cost of online registration is £12, while postal registrations typically cost £40. If you opt for postal registration, you also have the option to pay £100 for a same-day registration service.
What taxes will my company pay?

Once your limited company is registered with Companies House and becomes active by providing services and receiving income, it is required to pay corporation tax on its profits. You must register your company for corporation tax within three months of it becoming active, and you can do this at the same time as your Companies House registration. If you're uncertain whether your company is considered active, you should check with your accountant to avoid the risk of a fine for late registration.
It's essential to file a company tax return annually by the deadline set by HMRC, and you'll need to register for PAYE if you pay salaries, including your own as a director. Additionally, your company may need to register for VAT, or you may opt to do so even if it's not required. Learn more about tax obligations for small businesses.
How long does it take to set up a limited company?

Establishing a limited company in the UK is a quick process, and it can be done in a short amount of time. If you opt to set up your limited company via post, it may take up to 8-10 working days. However, our company specialize in online limited company formation, which can be completed in just a few hours.
How will I get paid through my limited company?
As a director of a company, there are primarily two ways you can receive payment: through a salary or dividends paid out of company profits. Many directors opt for a combination of the two methods as it is the most tax-efficient way. While dividends have the advantage of lower tax liability, they can only be paid from profits and have some disadvantages. On the other hand, salary offers certain benefits like state pension and parental benefits, and doesn't require the company to be profitable. However, it is taxed at a higher rate. You can learn more about receiving payments from your company.
Legal responsibilities of running a company
As a director, you will have certain legal obligations, such as overseeing financial accounts and disclosing any personal benefits you receive from company transactions to other shareholders. It is possible to delegate these duties to an accountant or company secretary, but ultimately, you are responsible for ensuring that they are carried out properly.

If you are starting a new company, rather than already operating as a sole trader, you may find it helpful to refer to us on how to start a business.
Year-end reporting for your company
At the end of your financial year you must report key information to HMRC and Companies House. This ensures that the company pays the tax it owes, and also provides accurate information about the company to its shareholders, investors, creditors and the general public. Find out with us more about financial year-end reporting.
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