The Checklist You Need Before Registering A Limited Company

Thinking of doing business under a limited company ?

This will certainly be the best form of business structure at your disposal. Its legal form makes it complex, but your success will depend on how you address all its compliance requirements, many of which involve accounting and disclosure.

This page will give you an outline of requirements you need to get started and successfully see your future small business grow into a competitive limited company.

Definition

Incorporation is the process of forming a corporate body - usually in the form of a limited company. The term limited refers to limited liability.

Whereas sole traders and partners can be held personally liable for all business debts, a limited liability company is a separate legal entity to the owners and can own property, incur debts, sue and be sued in its own right. Any business dealings are made on behalf of the company so the owners are normally liable only for the amount invested.

There must be at least one director to manage the business and a company secretary to make sure all the rules are followed and official records maintained.

There are several methods of setting up a company:

• dealing directly with the Registrar of Companies


• enlisting the services of an accountant, company formation service or online registration company to provide an 'off the shelf' or readymade company.

Shareholder Relationships

You must draw up a shareholders’ agreement.
This will help you and all other shareholders involved in starting the new limited company to know where you stand within the business.

The agreement should cover key issues for the business and likely ‘what-if’ scenarios, including:

• Investing money. Who contributes how much and in what form (eg as shares or as a loan), for what reward?


• What happens if more capital is needed next year? How much will the company need to borrow and on what terms?


• Withdrawing money: what dividends, directors’ fees and salaries will be paid?


• What happens if one person needs to take out extra money?


• Responsibilities. Who makes decisions? Who is responsible for each business area? How will progress be monitored?


• Growth. How fast will you expand? Into which areas of small business? How much risk are you ready to accept?


• Split up: can you buy each other out? Can you split the limited company up? How? And how will the shares be valued?

Advantages

The advantages of having a limited company tend to increase as your business grows:

• Your liability is limited to the amount you agree to invest in the company by buying its shares.
  However, there are still circumstances where personal liability may arise. For example, by giving personal guarantees or security on company borrowings or the company trading wrongfully or fraudulently.
• shares in a company are easier to transfer than a partner's interest in a business


• a company still exists upon the retirement or death of its owners


• It is easier to raise large sums of money for the business or sell a part of the business


• a limited company has more credibility making it easier to raise finance


• a company is subject to corporation tax rather than income tax which is usually advantageous for small businesses
• There can be tax advantages for high earners through keeping money in the business or making pension payments.
• a company can pay dividends which can be advantageous to the shareholders in some circumstances.

Disadvantages

The disadvantages are mainly associated with greater costs and complex obligations:

• annual accounts are more complicated and certain details need to be filed with the Registrar of Companies, which will make your company information available to the general public
• much more administration and paperwork will arise


• If your turnover climbs above a certain limit, an independent audit will be compulsory.
  This will usually cost you at least $2,000. In some jurisdictions, it is a criminal offence to recklessly or knowingly include misleading, false or deceptive matters in an audit report
• directors are treated as employees and so are subject to PAYE/NIC on their earnings


• it can be more difficult and expensive to wind up a company than it would be for a sole trader or partnership


• shareholders and directors may have to personally guarantee contracts entered into with lenders or suppliers. So personal liability can still arise

Record Keeping

For a limited company, the Companies Act 1985 governs the standards of the accounting records you must keep.

Every company must prepare annual accounts that report on the performance and activities of the company during the year. The period you report on in the accounts is called the financial year. This starts on the day after the previous financial year ended e.g ( 31st December for most companies) or, in the case of a new company, on the day of incorporation.

Accounts normally fall into two sections:

• First are the year end accounts - these are produced annually for the 12 months up to the business year end each year.
  For example, if your company was incorporated on 10 June 2005 its annual reporting date would be 30 June , and the first accounts would cover a period from 10 June 2005 to 30 June 2006.

As a limited company, you will be required to file the details of these accounts at the registrar of companies.

It is fair to say that the vast majority of small business owners use an accountant to prepare the year end figures. This is because this process is a highly technical area and although you can assist in keeping the records accurately and up to date, a qualified accountant can ensure that the accounts are finalised properly and conform with all local legislation.

• Second are the monthly or quarterly accounts - sometimes known as management accounts. You will produce these much more frequently for specific purposes. For instance the performance of the business needs to be constantly monitored and outside users such as banks and other lenders may request this information.

  These accounts do not generally have to be produced by law but it is important that they are as accurate as possible so that the true position of the company can be assessed. Again the involvement of an accountant will help you in this process.

Generally, a set of limited company accounts must include:

• a profit and loss account (or income and expenditure account if the company is not trading for profit);


• a balance sheet


• an auditor or accountant’s report (if appropriate);


• a directors' report


• written notes that accompany the formation of the accounts;


• group accounts (if appropriate).

Filling Tax Returns

All Limited companies are normally required to file a set of duly signed audited accounts together with their annual tax return with their national Tax Authority.

A last date for filing returns is set following the company’s relevant accounting period, beyond which late entrants will be subjected to a penalty. Ask your accountant or check with the local authority for this information to avoid late entries.

The company return uses figures from the accounts and is also the basis of the tax calculation for the year.
Once your accountant has calculated the tax liability he/she can tell you the exact amounts to pay and when they are due. In the case of a tax refund being due, your accountant should also organize this.

Approval and signing of the accounts:

The accounts must be approved by the company's board of directors and signed before they are sent to the registrar of companies.

• The balance sheet must be signed by a director, with any statements about accounting or filing exemptions appearing above the director's signature.
• The directors' report, if one is required, must be signed by a director or an appointed company secretary.
• If an auditors' report, special auditors' report or accountants' report is attached to the accounts, then it must state the names of the auditors or accountants and be signed and dated* by them.

As we earlier said, a limited company is by far the best form of business structure you can ever undertake with the hope of seeing your small business graduate to its highest peak.

We shall be eagerly standing by as your accounting guide to help you make informed strategic decisions for the future of your business.

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