Following the success of our blog ‘Company formation myths debunked’, we are delighted to present the second instalment of the series. In this episode we debunk the most commonly held myths about the limited company structure.
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 instalment of this series, check it out here – Company formation myths debunked
All personal and financial information will be made public
To ensure corporate transparency and reduce fraud, some personal and financial information will be made public when you register a limited company and become a director, shareholder, or person with significant control (PSC). However, you can still protect your privacy.
Your full name, nationality, country of residence, and partial date of birth, are made public, but your home address will only be made available if you use it as a registered office or service address.
With regards financial information, most SMEs only need to publish unaudited abbreviated accounts. In general terms, the smaller the company – the less details require being disclosed.
A limited company always protects you from personal liability
Incorporating a limited company provides ‘limited liability’ to shareholders, as well as directors who are also shareholders. This means that your personal assets are protected and you are only liable for company debts up to the nominal value of your shares.
You are not protected if you provide a personal guarantee on a business loan, or sign a contract in your own name instead of the company name.
Furthermore, limited liability does not protect an individual who has acted fraudulently, with gross negligence, or with criminal intent. It is, therefore, advisable to safeguard yourself and your business with additional cover, such as Employers’ Liability, Public Liability, Professional Indemnity (PI), and Director’s & Officers insurance.
A non-trading company does not need to submit annual filings
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. You will therefore 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.
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 (2021/22 tax year).
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.
You can avoid paying tax with 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% for all non-ring fenced profits. 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 pay between 20% and 45% Income Tax, as well as National Insurance, on all annual profits.
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.
A dormant company is a specific company structure
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.
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.
Money in a company bank account belongs to the shareholders
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 shareholders, or even the directors, 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.
It costs too much to run a limited company
The cost of running a limited company is generally a little more than running a business as a sole trader. This is mainly due to the need to prepare and file annual accounts at Companies House. Having said that, we would recommend all businesses prepare accounts, whether there is a statutory need to file them or not.
Many small business owners prepare and file their own annual accounts; however, most enlist the help of an accountant, usually paying £750 to £1,500 per year.
The other limited company filing requirement is an annual confirmation statement which you can file yourself at Companies House at a cost of £13.00. Or, you can ask a professional to do this for you – see our Confirmation Statement Service costing £34.99.
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.