The decision to set up a new limited company, either from scratch or growing from a sole trader business or partnership, is a significant step that signals how you intend to run your business in the future. There is a plethora of financial and legal implications that need to be considered, as well as a number of statutory requirements that limited company directors are required to meet.

In this article, Foys’ specialist company and commercial solicitors discuss some of the reasons as to why limited companies are often chosen over partnerships, and detail the legal and financial implications that this process entails.

Why start a limited company?

For anyone considering setting up a new limited company, or transferring their sole trader/partnership business to a limited company, it’s important to consider the advantages and disadvantages of such a venture.

Common reasons why you want to set up a limited company include:

  • Limit your liability – your business is a legal entity and is separate from you. Your suppliers, clients, and employees enter into contracts with the corporate entity instead of you, and therefore you aren’t personally responsible for its debts, lawsuits and other adverse implications.
  • Tax consideration – the current corporation tax rate in the UK is 19% and will reduce to 17% for the year starting 1 April 2020; this is regardless of a profit of £10,000 or £100,000. Sole traders pay tax on personal income – and in tax year 2019/20, the basic rate is 20% on any income up to £37,500; 40% on income from £37,501 to £50,000.
  • Reputation – a limited company tends to carry more weight and has a better professional appeal than a sole trader. Your suppliers, customers, partners and employees may also perceive that a limited company is more credible than a sole trader.

In terms of the disadvantages, privacy is a commonly mentioned issue. Running a limited company means you are required to submit information about your company and yourself to Companies House, which can be viewed publicly and will include various personal details.

Also, as a director, you are directly culpable for your legal responsibilities as defined under the Companies Act 2006 – such as filing company records and reporting changes to Companies House and HMRC.

Legal obligations

There is a distinct nexus between the legal and financial considerations of a limited company. Many of the financial and tax obligations intersect with the legal considerations that you must make. For example, filing the return of company accounts to Companies House is statutory, as is the keeping of company documents and the reporting of any changes to Companies House.

One interesting legal dimension pertaining to the limited company is that your duties as a director are codified in the Companies Act 2006. This states that you must make decisions that are in the company’s best interests, the interests of the employees and the interests of shareholders – rather than your own. This means you are obligated to notify other directors and/or shareholders if you stand to benefit from a company transaction or if there is a conflict of interest. You must also avoid accepting benefits from third parties.

A confirmation statement (previously known as an annual return) must also be submitted annually to Companies House. This should essentially confirm that all of the details on file at Companies House are correct, including a register of persons with significant control (PSC) of the company. If there are any changes to your business after this has been filed, you must let Companies House know as soon as possible.

Lastly, you have to stay up-to-date on any regulations or laws that impact your business – such as matters of employment – as well as those that relate to your industry.

Required legal documentation

If starting a limited company or incorporating your sole trader or partnership business as a limited company is the right option for you, then we recommend seeking specialist legal support. A company solicitor typically assists with drawing up the following documentation:

  • Shareholders’ Agreement is a contract outlining the roles, rights and obligations of the limited company’s owners.
  • Memorandum of Association outlines the shareholders’ agreement to form the limited company.
  • Articles of Association detail the agreed upon written rules of running the company to be sent to Companies House.

If the document has to be changed for any reason, then you’ll need a lawyer to re-draft the document and notify Companies House of any changes, who will then pass this on to HMRC.

This serves the purpose of setting out your rights as a shareholder as well as protecting your shares in the company and can be exercised by one of our specialist company lawyers.

How company solicitors at Foys can help with your limited company

At Foys Solicitors, we understand how complicated it can be to set up a limited company or incorporate a sole trader or partnership business to a limited company and we can definitely help.

We have a proven track record of working with limited companies to ensure that they are meeting their statutory requirements as set out by the Companies Act 2006.

Our company lawyers offer legal advice on matters such as:

  • Questions relating to regulations and statutory expectations
  • Director disputes
  • Crafting shareholders’ agreements
  • Drawing up a memorandum of association and articles of association
  • Employment law matters
  • Commercial property transactions

We will work to safeguard your company against any legal complications while striving to help you grow and adapt your business to the challenges that lie ahead.

For us to understand your business better and offer our expert, bespoke guidance, we offer a free initial consultation that can be held at one of our many local offices.

To find out more or to book your free initial consultation, simply fill out our Online Form, or call your local Foys Solicitors office:

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This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.

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