Debunking Myths About Limited Companies
Have you ever wanted to set up a limited company, but you've been put off by something you've heard about the process? Or maybe you're afraid of the running costs? Have you ever stopped to wonder whether you've been taken in by a myth that actually isn't true? This post aims to shed some light on these myths and hopefully debunk them for you.
Myth 1 - All personal and financial information will be made public
This one is partially true. Some of your information will be made public, but not all of it. Your full name, nationality, country of residence, and part of your date of birth will be made public. Your home address is kept private unless you are using it as your registered office address, or service address.
Only financial information about the company is made public, and in some circumstances, not all of it. If your company is classed as an SME, you may be able to publish abbreviated accounts.
Myth 2 - You are always protected from personal liability
In most circumstances this is true, you are protected up to the nominal value of the shares you hold in the company. Thus protecting your personal assets.
However, you are not protected if you provide a personal guarantee on a business loan, or if you sign a contract in your name rather than the company name.
Further to this, if you have acted fraudulently, with gross negligence, or with criminal intent, you will not be protected. You can safeguard yourself and your company by having cover in place such as Employers' Liability, Public Liability, Professional Indemnity and Directors' and Officers' Insurance.
Myth 3 - A non-trading company does not need to submit annual filings
This one just isn't true at all. All private companies, whether active or dormant, must file an annual confirmation statement and annual accounts.
If your company has never traded, or if you have no significant transactions during the accounting year, it will be classified as dormant. Therefore you will need to prepare and file dormant accounts and a confirmation statement with Companies House every year as proof of this standing.
Myth 4 - You need to register for VAT
A company has no legal obligation to register for VAT with HMRC unless their annual VAT taxable turnover is more than £85,000 (figure correct as of 2021/2022 tax year).
Most small companies are therefore exempt from registering for VAT because of this threshold. However, you may find that it is beneficial to your company, for example, some suppliers may only be willing to deal with VAT registered companies. If you find that this is the case, you can choose to voluntarily register for VAT.
Myth 5 - You can avoid paying tax with a limited company
One of the benefits of being a limited company is that it can be more tax efficient in terms of business structure. However, this doesn't mean you can avoid paying tax.
Currently, companies pay 19% Corporation Tax for all non-ring fenced profits. Also, there are options to pay yourself tax efficiently through a company, take advantage of business reliefs and expenses, and invest pre-tax income into a pension.
This is different to how it works with sole traders and other small businesses. They have to pay between 20% and 45% Income Tax, as well as being paying National Insurance, on all annual profits.
Myth 6 - You have to hold an annual general meeting
This is a myth you'll have to make sure of yourself. As per the Companies Act 2006, there is no legal requirement for a company to hold an annual general meeting, unless it is stipulated in the articles of association.
Many companies, however, choose to hold general meetings to discuss the progress of the business, review strategies and vote on matters requiring shareholder approval.
But please check your articles of association to make sure you're not required to hold an annual general meeting.
Myth 7 - Dormant companies have a specific company structure
Simply put, a dormant company is one that has been incorporated with Companies House but does not receive any income (not even interest), you need to notify companies house of this through submitting annual accounts and confirmation statements.
Myth 8 - A limited company must have a business bank account
While this isn't a legal requirement, it is highly recommended. If you don't have a specific bank account for the business, all income and expenditures must go through your personal account. This can lead to confusion when it comes to bookkeeping for your business, while also leading to problems when filing annual accounts.
Myth 9 - Money held in the bank account belongs to the shareholders
This is not true at all. When you incorporate a limited company it becomes its own legal entity, therefore, any money held in the bank account belongs to the company, not any individuals associated with the company.
The same applies to business debts, as long as they are taken out in the name of the business, they belong to the business.
Myth 10 - It's expensive to run a limited company
It's true that it does cost more to run than a sole trader set up, mainly due to preparing and filing annual accounts with Companies House.
It is possible to prepare and file your own accounts; however, it can be best to leave this to the professionals if you're not sure what you're doing.
That's 10 myths debunked
Hopefully, this post has shed some light on the myths you might have heard about starting or running a company. This list isn't by any means exhaustive, but hopefully it's got you thinking about some of the things you might have heard and how much you should trust in them.