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Top 3 mistakes when setting up a limited company

It can be exciting to set up your business as an official company. Some say that a company is a great vehicle to reduce tax liability and help protect you as an individual with its limited liability. However, there is much more to consider when setting up a company entity. Here are three examples of the common mistakes we have come across.

1. Not knowing the full picture

Limited liability and reduced tax liability should not be the only factors in your decision making. Other things to consider are:

Public information is public

On Companies House, all of the information you submit to the register is on public record. This means that anyone can look up your company and see how it is performing. Generally, smaller companies do not need to submit a profit & loss statement to Companies House. However, despite this, more experienced individuals can still find out how the business is performing. These individuals could be your suppliers, competitors, employees, or even your neighbours. Therefore, you need to be comfortable with the fact that anyone could search and view your company’s performance.

Controlled access to finance

As a director or a shareholder, you cannot withdraw funds from a company as if it were your bank account. You would only be able to withdraw funds from a company via a wage, dividend and director’s loan repayment. All of these also require discipline as every decision affects the business. Working with a good accountant can help reduce your tax bill and stop you from paying S455 tax on your director's loan too.

Increased accounting fees

Generally, limited companies tend to pay higher accountancy fees than a sole trader. This is due to the additional disclosure requirements and financial elements involved - something to bear in mind when going down this route.

2. Only issuing one share

One of the most common mistakes we see when looking up companies on Companies House is that the directors and shareholders have only issued one share. There is nothing wrong with doing this, but it can make things slightly more complicated in the future.

You should issue more than one share in case you wish to gift some shares to your life partner or bring in new investments at a later date. By only issuing one share, you may be diluting your shareholding.

When setting up a company, it is better to issue 100 x ordinary shares of £1. This allows you to gift shares and sell some of your shares whilst still maintaining control of the company.

If you have already set up the company with one share, you can issue additional shares or subdivide the shares. We recommend that you speak to an accountant before going ahead with this.

3. Using your home address as the registered office

We frequently see directors using their home address as the company's registered address. Similar to the shares example, there is nothing wrong with this action. However, using your home address means that it is now on public record. This means that suppliers and customers can see your home address on Companies House and know where you live.

If you have a business address (storefront), it is recommended that you register this address. Afterall, It is your place of business. It therefore makes sense to use this address for your customers and suppliers. Lawyers and accountants will generally help with address registrations as part of setting up the business or preparing annual accounts. There are also service providers who offer businesses the use of their addresses.

One last tip

When starting a business or transitioning from being a sole trader to a limited company, it is important to take into consideration the full picture. Whether it’s financially related or not, this is a big decision for you and your business. Therefore, we would always recommend that you speak to an accountant before committing to setting up a limited company.

Let us know if you need a hand, we help business owners like you every day. Email us at Enable JavaScript to view protected content. or phone us on 0131 364 4191.

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