I always say congratulations to people who tell me they’ve incorporated. They may chuckle back, but I sincerely mean it. It’s great news, you can say you’re a Director and Shareholder (in most cases) of your very own business. A limited company, in fact.
However, from the moment you incorporate, there is a lot to take in. Understanding of how the compliance, structure and an what “going limited” entails is needed, from day dot. It shouldn’t feel daunting at all. But, the more you are aware of what is required, the less of a burden you will have when it comes to filing those accounts and taxes.
It’s still a common occurrence people have come to me, a year-and-a-half down the line from incorporating, handed me a set of books only for me to tell them the bad news that there are errors and mistakes to fix. It’s the equivalent of wiring my entire home myself and calling the electrician up to certify it’s safe. Unintended tax consequences or costly reworks mean more pressure on your bottom line.
Here are my top six tips for those starting new limited companies to ensure they begin on the right foot.
Set up a Limited Company bank account
Rule 1 when it comes to a limited company is that it’s not you, it’s a separate entity. You just happen to run and own it, but it is for all intents and purposes completely distinct from you. Therefore, when the limited company earns money, that money belongs to the limited company.
More on this below, but the key point here is to ensure that limited company can receive and pay out cash in the first place. You need to set up a business bank account.
Using a personal account will not cut it. You will most likely breach the terms of your banking arrangements. This means they could do anything from charge fees to close your accounts down.
This should be one of your first jobs once you’ve incorporated. Some banks will charge a fee, maybe with a free banking period of a few months before. Other newer banks will offer free services but could charge for things such as cash withdrawals or deposits. Depending on how your business works will depend on what bank is better for you.
Most banks do this these days, but make sure your bank can feed into a bookkeeping system (more below). This will make your life a lot easier too.
Never mix business with pleasure
This phrase couldn’t be truer when it comes to being a Limited Company owner. It is tempting to use your shiny new business bank account to pay for your shopping, the bowling trip with the family or your Netflix membership, but this isn’t recommended.
Your accountant should be duly disallowing all this expenditure and what you’re doing here is three things:
- Creating more work for your accountant and bookkeeper, which will drive up their fees;
- Inadvertently creating another tax charge through a growing Director’s Loan balance; and
- Losing sight of how successful your business really is by having to untangle lots of personal spend.
A Director’s Loan balance where you – the director – owe the business money is bad news. You open yourself to benefits in kind on the loan if you don’t charge interest to yourself and could be inviting a nasty s.455 tax charge, levying a hefty 32.5% on the loan balance.
Instead, agree a way to take funds out of the business through salary or dividend and then use that income to fund your personal purchases.
On the topic of Director’s Loans, sometimes the balance can go the other way. That is, the business owes the director money. There is nothing wrong with this and in fact, it presents an opportunity to charge the business interest, giving the business another deductible expense and in some cases a tax-free income to the director.
Get bookkeeping software in place
As much as QuickBooks and Xero are advertising “taxes – done” in a click, I do think that’s a real underestimation on the knowledge needed around accounting, bookkeeping and taxation in the UK. BUT … Having this software in place is nothing short of essential to ensure you are getting those basics right.
QuickBooks and Xero will keep you on the straight-and-narrow with recording the basics of your business, such as your income, expenditure and bank balance.
Beyond this, these tools can become a cornerstone of your business, for example by pulling in bank feeds and controlling that new bank account or providing you with a tool to issue quotes and invoices, or even receive payments.
Software is relatively inexpensive too and sometimes you can purchase a subscription through your accountant (that’s what we offer, by the way).
It’s usually worthwhile to seek some basic training in the software and have an accountant or bookkeeper on hand to help guide you around how it all works if you’re going to do it yourself.
Avoid the temptation of a spreadsheet, or even worse, the shoebox of receipts.
Finally, these tools have some unique apps that ‘bolt on’ to your software. One of my personal favourites is Dext, formerly known as ReceiptBank. Dext allows you to effortlessly manage the admin of your expenses and deal with the dreaded admin effortlessly.
Understand how the taxes work
Now, you should in theory be working with a fantastic accountant who will make sure you are set on all this. However, my approach is that how businesses are taxed should be no big secret. HMRC publish everything, but you need to ensure you understand what drives the tax. Understanding this will make your life a whole lot easier and help you with things such as saving for tax bills. This is a completely new concept for those coming from an employment where your taxes were paid as you earned (PAYE).
In short, you have the following:
- Corporation tax, which is charged on your business profits. There are things here such as capital allowances, or disallowable items which alter this, but it’s in broad terms 19% (at least until 2023).
- Income tax, which is taxed on your own personal earnings. This is either from a Company salary, or dividends. Tax rates vary depending on how much you earn.
- VAT, which becomes an issue if you turn over more than £85k in a twelve-month period and is paid on the net of VAT on sales less VAT on purchases. You may want to register voluntarily though under certain circumstances.
- PAYE allows you to pay yourself and staff. Your obligation as an employer is to correctly withhold taxes from staff and pay these onto HMRC.
- Construction Industry Scheme – the CIS comes into effect if you work in the construction industry. This is again another form of withholding and your role differs whether you’re a contractor or a subcontractor.
The above is a huge simplification, but it should give you an idea of what to expect. Plan and ensure you have money set aside and be prepared for those cash flow crunches when tax becomes payable.
This might sound obvious, but limited companies bring a lot of admin. Set aside time to keep on top of the paperwork receipts, invoices, quotes, and other obligations you have to handle.
There is always a danger people work too much in the business and not on it. You are too focused on the day job and not on the other things from strategy to basic admin. Carve aside that precious time to get this all done promptly and keep it a small, manageable job to do.
Aside from setting aside time, I find having structured lists and to-dos helps me keep on top of things. Every industry is different, and some things benefit some businesses more than others. I find the fantastic app Todoist is an evergreen solution, has a free plan and is incredibly easy and flexible to use.
Especially if this is your first foray into business from employment, you will soon discover there is an awful lot more to running a Company than doing the day job.
Get your accountant on board early
Managing the finances of your business will be a time-consuming matter. Some like it, some despise it. Generally, though, accountants love it.
Having an accountant with you on those first steps of the journey is going to take all that stress away and give you that time back. A good accountant will keep you informed on taxes, handle the accounts and books. They will keep you in check throughout the whole setup from getting your software running well to keeping a keen eye on director’s loan balances for you.
There are plenty of ‘once a year’ accountants out there, but I don’t mean one of those. I’m talking about an accountant who could be your trusted advisor and will hold your hand throughout the whole process.
Sure, you may have a monthly fee for the privilege, but they should be paying their way in saving you time and money. Furthermore, you’ll likely avoid costly rework bills to correct mistakes and will likely avoid traps such as the dreaded s.455 mentioned earlier.
Going limited is worth celebrating, but it brings with it standards and compliance needs that need to be kept in check. Keep on top of those and you can really begin to look forward towards building your brand-new business.
Still not sure about incorporating? Well, why not read my other blog about whether being a sole trader could be a better option.
Starting out in business and need a helping hand? Get in touch today to see how we can help.