UK Limited Companies I An Accounting Guide

So, you're looking into trading as a limited company...

Perhaps you have already incorporated your company? Maybe you are starting a business and are researching about trading as ltd company? 

No matter the circumstances, this guide to UK limited companies will outline all the main responsibilities and duties that are required of you, as well as highlight the main differences between trading as a sole trader vs a limited company. By the end of this ltd company checklist, you will know what is expected of you as the owner of a ltd company...

Limited COmpanies - Directors and sh​areholders

Shareholders Explained

A limited company is owned by at least one shareholder, which is usually the business owner(s) and founder(s). Shareholders own company shares.

The company can have as many shareholders as it needs, each shareholder owning a percent of the company. Most small ltd companies have 1-2 shareholders. 

A shareholder is entitled to receive a share of the company profits (if there are any), based on their percentage of share ownership. For example, a shareholder owning 50% of the company shares will be entitled to 50% of the company profits. The withdrawing of company profits to a shareholder, usually by transferring cash from the company to the shareholder, is called a 'dividend'.

Directors Explained

A limited company also has at least 1 company director.

​A company director doesn't have to be a shareholder and a shareholder doesn't have to be a director. 

Directors usually run the business. Shareholders own the business. For most small ltd companies, the shareholders are also the company directors. 

Limited Companies - The differences between ltd companies and sole traders

The main differences between the 2 business structures are...
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• Taxation. Limited companies are taxed very differently to sole trader businesses. For higher rate earners, it can be more tax efficient to trade as a limited company rather than a sole trader. For lower income individuals and businesses, trading as a sole trader can be more tax efficient. 
• Separate Entities. A limited company is a separate entity to it's owners (shareholders) for tax, liability, and legal matters. Whereas the owner of a sole trader business is the business - the owner is personally liable for all tax, liability, and legal matters. 
• Limited Liability. Due to it's separate entity status, ltd company owners are generally not personally liable for company debts, including loans, taxes, credit cards, and creditors that are in the company's name. Or at least their personal liability is limited, hence the term 'limited company'. Sole traders are fully personally liable for business debts. 
• Professionalism. Trading as a limited company can provide a more established and professional impression than a sole trader business. 

Limited Companies - What is ReQUIRED? 

From an accounting perspective, a limited company is required to do a number of things. To help with this, below is a limited company tax and accounting checklist... 

Keep accounting records

A limited company should do regular bookkeeping and keep accurate accounting records. This should be in double-entry format but this is not essential. Accounting software such as Sage Business Cloud, Xero, or QuickBooks Online can help. 

A limited company should also have at least one business bank account in the limited company's name. Personal bank accounts should not be used for ltd companies. 

If you need to learn how to book-keep and keep accounting records, then please consider our free bookkeeping course. 

File an annual confirmation statement

Companies House requires that every ltd company files an annual confirmation statement. This statement basically confirms the details that Companies House has on it's records and public register about the ltd company. 

To file the statement, you will need to know the company's authentication code and have an online Companies House account. The company will also need to pay a £13 filing fee. 

Annual Accounts

HMRC and Companies House require that a set of annual accounts be filed every financial year for the company's year-end. A company usually has 9 months to file this, after it's year end. 

There is nothing stopping company owners preparing and filing the accounts themselves, but it is always best to use an expert, such as a licenced accountant. To cut costs, some company owners try to compile year end accounts themselves, but this usually results in accounting discrepancies, paying higher taxes, and receiving financial penalties from HMRC and/or Companies House due to filing accounts incorrectly or making mistakes. 

Annual accounts will need to be in double entry format, include both a balance sheet and profit and loss statement, and have adjustments for corporation tax, capital allowances, depreciation, and other accounting items. 

To file accounts, you will need the company UTR from HMRC and the company authentication code from Companies House. 

If you need an accountant for your UK limited company, you can contact me at www.smaccountinguk.com

Corporation Tax Return

A CT600 corporation tax return will need compiling and filing with HMRC. 

Once again, this is due for a year end and has a deadline. 

Once again, it is best to use an accountant for doing this. 

Self Assessment Tax Returns

If shareholders have withdrawn any dividends, then they will need to declare these on a self assessment tax return for income tax purposes.

Each shareholder will need to register for self assessment individually. You can register for self assessment here. 

Limited Companies - Taxation

As mentioned previously, taxation for a ltd company is very different to a sole trader business. 

A limited company is liable for corporation tax on it's company profits. This is calculated and filed on the companies CT100 corporation tax return. Any dividends paid to shareholders are then declared on personal self assessment tax returns. 

With a sole trader business, the profits from self employment are simply declared on a self assessment tax return only. 

To see the current UK corporation tax and income tax rates, please click here.