The formation of a company of one’s own opens up the way for a better business and higher profitability. In addition to cost cutting, one can reach out to more number of customers and deal directly with them. If the idea of starting a new company strikes you and you want to form a limited company, you have to update yourself with some relevant information. These are applicable to the process of company formations in the UK.
Right from the beginning, i.e. the naming to the winding up of the process, you need to observe some formalities. To begin with the naming, you have to include the word ‘limited’ in the name of the company. Since you are to form a limited company, you have to display it in the name. Company law in the UK says that the word ‘limited’ though in the contracted form, ‘ltd’ should be there in the name.
If you are in business, sometimes you are required to make some hard decisions. If you operate as a sole trader or in a partnership, you may consider converting the business into a limited company. The main benefit attributed to the company is the limited liability that is bestowed on shareholders and company officers. For the non-limited business or a sole trader, personal assets stand the risk in the event of business failure. This is not the case with companies, as long as they operate legally, the personal assets of shareholders or directors are not at risk at the point of winding up and receivership. However, they are several challenges experienced in forming a company including:
Higher administrative & legal cost
Forming a limited company attracts higher administrative costs, which include new systems & accounting records, new PAYE system, new stationery, new tax reference and new VAT registration. Furthermore, setting up a limited company requires the management to file tax returns. Therefore, customers, service providers and suppliers need to be informed of the changes to the status of a limited company. Some of the service providers may choose to discontinue working with the company as a result of the changes.
Accounts must comply with Companies Act requirements
The tax position of a limited company needs to be analyzed carefully. The annual accounts need to comply with the Companies Act requirements. Therefore, a statutory audit may be required for companies with a turnover of more than £6.5 million. The audit involves work that is over and above the audits conducted for sole traders or partnerships.
Accounts filed for public viewing
The accounts of a limited company need to be filed for public viewing. Therefore, an annual return is normally submitted with the Registrar of Companies with a filing fee submitted, as well. Failure to file the company’s returns on time attracts a severe penalty.
Taxed on profits
A company is taxed on profits, every accounting period is subjected to income tax on the current year basis like in the case of a sole trader or partnership. The company is expected to file tax returns for every accounting period.
Tax implication for withdrawn funds
Unincorporated businesses can introduce as well as withdraw cash without possible tax implications. On the other hand, funds withdrawn from companies give rise to tax liability.