Following the success of our blog ‘Limited company myth buster’, we are delighted to present the second installment of the series. We continue to debunk the most commonly held myths about setting up and running a limited company in the UK.
We have been passionate about providing simple, cost-effective company formation for many years now. In that time, we have uncovered a great deal of limited company myths, many of which discourage people from setting up a limited company and taking advantage of the benefits available.
If you missed the first installment of this series, check it out here – ‘Limited company myth buster’.
Myth #1 – A company that has not traded is not required to file confirmation statements or accounts
All private limited companies, whether trading (active) or not trading (dormant), must file an annual confirmation statement and annual accounts.
If your company has never traded or has had no significant transactions in the accounting year, it can be classified as dormant and you will only require preparing and filing dormant accounts and a confirmation statement at Companies House every year.
A company that is classified as dormant does not need to file accounts or tax returns with HMRC.
Myth #2 – Shares need to be paid at the time of incorporation
It is not always the case that shares need to be paid at the time of company incorporation. It depends entirely on what is stipulated in the company’s articles of association and/or shareholders’ agreement.
Under the ‘model articles’, which the vast majority of private companies adopt, shares issued at time of incorporation do not require being paid. However, all shares allotted thereafter, require being paid in full at the time of issue.
If a company wishes to include different provisions for the payment of company shares, it must alter the model articles, create bespoke articles, and/or draw up a shareholders’ agreement.
Myth #3 – It is better to issue a lot of shares
Every share has a nominal value, which represents a shareholder’s personal liability for company debts. Therefore, the more shares that a company issues, the higher the financial liability of its shareholders.
A company that is set up with just one shareholder and one director need only issue one share. There is no real benefit to issuing more shares than you need, unless you’re planning to sell them in exchange for investment, or a higher quantity makes it easier to apportion ownership between multiple shareholders.
If you are at all unsure about the share structure of your company, it is important to speak to an accountant.
Myth #4 – The value of shares issued at incorporation reflects the size of a company
The value of shares that a company issues during and after incorporation does not reflect the size of the business. This ‘nominal’ value simply reflects the limit of the shareholders’ liability for company debts. For example: if a company issues 100 shares with a nominal value of £1 each, the total personal liability of the company’s shareholders is £100.
The true value and size of the company, however, will usually be completely different. A huge company worth millions of pounds may have just one or two shares that are owned by one or two individuals; whereas a tiny startup that has not yet made a profit could have 1000 shares split between 100 shareholders.
Myth #5 – Shares can only be issued in British Pounds Sterling (GBP)
Most UK companies, especially small ones, issue shares in British Pounds Sterling; however, companies are permitted to issue shares in any denomination or currency.
This may be beneficial or necessary for one or more share classes, if a company carries out significant trading activities in a different country or has major investors in non-UK countries.
Myth #6 – You can only trade in the country where the company is registered
A limited company registered in the UK can trade in any country in the world. This geographical freedom is incredibly beneficial. An English company, for example, can trade in all UK countries, as well as overseas, opening multiple branches in different countries.
Non-UK residents also benefit from the ability to register companies in the UK. The only geographical requirement is that the company maintains its registered office in the country of incorporation.
Myth #7 – You have to define your business activity and not deviate from it
When you register a company at Companies House, you need to choose a specific Standard Industrial Classification (SIC) code to describe the nature of your business, i.e. what your company does; the services it provides and/or the products it sells.
One SIC code is usually sufficient for most companies, but you can select up to four, if necessary. If your business activities change, you can simply choose a new SIC code or additional codes. Your company is not restricted to the original SIC code(s) selected.
Myth #8 – You need to register for VAT
Companies have no legal obligation to register for VAT with HMRC unless their annual VAT taxable turnover is more than £85,000 (2019-20).
Whilst many small businesses are exempt due to this threshold, it can still be beneficial to voluntarily register for VAT. In addition to creating a more impressive and trustworthy company image, you can reclaim VAT on goods and services that your business purchases.
Furthermore, many suppliers, organisations, and businesses may only be prepared to deal with other VAT registered businesses.
Myth #9 – You can avoid paying tax if you set up a limited company
One of the most significant advantages of setting up a limited company is that it can be a more tax efficient business structure; however, it will not enable you to avoid paying tax.
Companies currently pay Corporation Tax of 19% (2019) for all non-ring fenced profits – this rate will be lowered to 17% on 1 April 2020. There is also the option to pay yourself more tax-efficiently through a company, take advantage of more business reliefs and expenses, and invest pre-tax income into a pension.
Sole traders and other small businesses, on the other hand, pay between 20% and 45% Income Tax, as well as National Insurance, on all annual profits.
Myth #10 – You have to hold an annual general meeting
As per the Companies Act 2006, there is no legal requirement for a private limited company to hold an annual general meeting, nor any general meetings, unless stipulated in the articles of association.
This has been the case since 1 October 2007. However, many companies with multiple shareholders choose to hold general meetings to discuss the progress of the business, review strategies, and vote on matters requiring shareholder approval.
Myth #11 – A dormant company is a specific company structure that needs to be registered
A dormant company is simply a normal limited company that has been incorporated at Companies House but has not yet started trading (or has stopped doing business after a period of trading) and does not receive any income, including interest and investment income.
Companies may be permanently dormant if they are set up for the sole purpose of protecting a company name, whereas others may be temporarily dormant whilst the business is being set up or ceasing to trade for a certain period of time.
Myth #12 – Limited companies must have a business bank account
There is no legal requirement for a limited company to set up and use a business bank account, but it is good practice and highly advisable. Without a business bank account in your company name, your business expenditure and income will have to go through your own personal bank account.
This could cause confusion between company finances and personal finances. It will make your bookkeeping and accounting unnecessarily challenging and more time consuming, and it will not appear as professional to clients, suppliers, and other organisations you will be dealing with.
Myth #13 – Money in a company bank account belongs to the director / shareholder
This myth could get you into a lot of trouble! When a limited company is incorporated, it becomes a separate legal entity, just like a person. This means that business income belongs to the company, not the directors or shareholders, until it is legally transferred by way of a salary, dividend, expense, or loan.
Business debts are also the responsibility of the company, beyond the limited liability of the shareholders.
Additionally, a limited company can enter into contracts in its own name, lease and own property, hold shares in other companies, open bank accounts, be sued, and take legal action against other individuals and businesses.
Myth #14 – It is difficult and expensive to close a company
Closing down a company by voluntary dissolution or ‘strike off’ is a straightforward process costing as little as £10.00.
To dissolve a limited company, a director should apply to Companies House using form DS01 and pay the filing fee of £10.00.
A company must have ceased trading for at least three months, you must tell HMRC and all interested parties (e.g. shareholders, creditors, employees), submit final accounts and a Company Tax Return, and complete Companies House form DS01. Subsequently, your company should be struck off after two to three months.
Quality Company Formations provides a hassle free and cost effective Company Dissolution Service for only £49.99.