FINANCE My mate down the pub told me…

“…that setting myself up as a Limited Company would be a good idea. He told me it would save me loads of tax, and being a director always looks better than being a sole trader.” Accountant Jamie Crampton looks at the facts about setting up limited companies.

1. Companies are not owned by directors. Companies (any company, regardless of size) are owned by the shareholders. 2. Directors are appointed by the shareholders to run the company on their behalf. Directors can also be shareholders. 3. Being a director does not entitle you to a dividend. You must have shares in the company to be entitled to receive a dividend. All shareholders in a company are entitled to an equal dividend according to the number of shares held. 4. The company does not have to pay a dividend. Dividend payments are at the discretion of the Board of Directors. 5. Dividends can only be paid from a company’s net profit i.e. after tax. If there is no profit a dividend cannot be paid. If you have already drawn funds from the company and there is insufficient profit from which to pay them this money can be viewed as a loan to the director – which must be repaid. In certain cases loans to directors

not repaid at the end of a company’s financial year-end can be subjected by HMRC to interest at 25% on the outstanding balance. 6. Any salary paid to a director must be subjected to PAYE. A director is an employee and therefore any salary paid must be treated the same as for any other employee. Employer’s National Insurance must be accounted for on any salary payment.

Because of the “limited liability” nature of a company there are a lot more responsibilities that come with being a director of a limited company than being a sole trader, not least financially. There are many forms that need to be completed and submitted to both Companies House and HMRC, and late submissions will cost you a fine. In the last year alone the Treasury (to which Companies House passes on all fines) made a total of £90.4 million – just from late submissions to Companies House, not including any fines levied by HMRC.

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Limited companies undoubtedly have their uses and, when operated and controlled correctly, can be a major asset to your business, however it is always wise to remember that the onus of responsibility always lies with the Directors – not with their agents or accountants. The best advice is to do your homework, and always seek professional help if you are unsure.

THE AUTHOR

Jamie Crampton qualified as a chartered management accountant in 1995 and in 2008 set up Accounting 4 Fitness, dealing with clients in the fitness industry. In addition to this

he also advises personal training students on setting up in business and works with accounting students at the University of Bedfordshire in Luton.

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The REPs Journal 2012;25(September):24-25 The REPS The REPS Journal 2009;00(Month):00-00