Setting up a construction business as a limited company is appealing to many business owners due to its tax efficient format. If you’re ready to launch your construction business, here’s 10 steps to guide you through the set up process and help you to familiarize with the legal and financial obligations of starting a limited company.
What Is A Limited Company?
A limited company is an organisation that is referred to by law as a ‘moral person’. This means that the company has its own identity, is completely separate from its owner and does business under its own name. If the business makes money, it must pay tax, and if the business loses money, it can build up debt – just like a physical person.
1. Choose Your Company Name
Choosing a name is an obvious place to start, however, when registering as a limited company there are restrictions to the types of names that can be used as company names.
The company name can’t be the same as another registered company’s name. If your name is too similar to another company’s name you may have to change it if a complaint is made against you. Choosing a name that is already taken is not worth doing as it could confuse your customers and affect your business.
The company name must not be offensive, must not contain a ‘sensitive’ word or expression, and must not suggest a connection with government or local authorities, unless permission is granted to do so.
The company name must usually end in either ‘Limited’ or ‘Ltd’. You can include the Welsh equivalents ‘Cyfyngedig’ and ‘Cyf’ instead if you registered the company in Wales.
To see if a name is already taken you can check the companies house register here.
2. Appointing Directors and Shareholders
A limited company must have at least one director who is legally responsible for running the company and responsible for ensuring company accounts and reports are properly prepared and up to date.
Directors must be 16 years of age or over and cannot be a previously disqualified director. Whilst directors don’t have to live in the UK, the company must have a UK registered office address. All directors’ names and addresses are publicly available online from Companies House.
If you’re setting up a private limited company, you don’t need a company secretary, although, some companies use them to take on some of the director’s responsibilities.
The company secretary can be a director but cannot be:
- the company’s auditor
- an ‘undischarged bankrupt’ – unless they have permission from the court
For companies that have a company secretary, it is still the director that is legally responsible for the company.
3. Shareholders and Issuing Shares
Most limited companies are ‘limited by shares’. This means they’re owned by more than one shareholder that has certain rights within the company. If a decision needs to be made within the company, the director would liaise with the shareholders and they would discuss and vote for changes to the company.
How to work out your company shares
A company limited by shares must have at least one shareholder, who can be a director. If you’re the only shareholder, you’ll own 100% of the company. There’s no maximum number of shareholders.
The price of an individual share can be any value. If the company needs to shut down, shareholders will need to pay for their shares in full. You can choose a low share value (for example, £1) to limit the shareholders’ liability.
You can include any other shareholders in the company, as long as the total amount of shares are divided proportionately to the capital. Selling a share to another person can also be a good idea in the event of a tie-breaker vote, another person can make a decision.
Remember: You must pay stamp duty to HMRC whenever you sell shares to anyone.
When you register a company, you need to provide a statement of capital which states the information about the shares.
This should include:
- the number of shares of each type the company has and their total value – known as the company’s ‘share capital’
- the names and addresses of all shareholders – known as ‘subscribers’ or ‘members’
A company that issues 1000 shares at £1 each has a share capital of £1000.
You also need to include prescribed particulars which is information about what rights each type of share (known as ‘class’) gives the shareholder.
This must include:
- what share of dividends they get
- whether they can exchange (‘redeem’) their shares for money
- whether they can vote on certain company matters
- how many votes they get
4. Register with Companies House
When you have made all of the important decisions regarding your company name and the people involved (Directors and Shareholders etc) , you need to register your company with Companies House. To do this, you will need to go online and access the Companies House website, submit all of the required information via the set up form and pay a fee of around £12.
Companies House will check your application to register your company and see if the name you’ve chosen is available to use as well as ask you to appoint a company director and a company secretary. If you decide to use an accountant from the get go, they may do all of this for you.
5. Memorandum and Articles of Association
When registering your company, you will also need to file a Memorandum of Association with Companies House. This is a document that tells everyone why you’ve set up the company, and how you plan on running it. Should a tax dispute arise, this document can have significant legal importance to the courts.
If you are opting to write the document yourself, the key is to keep it simple and only state the key information needed including:
- What is your company for?
- How do you intend to run it?
It is always recommended to seek advise from your accountant before filling the memorandum.
6. Setting up a Business Bank Account
A limited company must have its own business bank account which is used for all income and expenses related to the business. Revenues earned by the company must be paid to the company account and cannot be paid to the company in your own name.
Having a business bank account also makes things a lot easier when managing accounts and filing tax returns. Having your personal and business finances kept separately makes managing your income and expenses clearer, which can really help your business to thrive instead of fail. It’s also how HMRC would expect you to manage your funds should an investigation take place.
A business bank account can take anything from a few days to a few weeks to set up, depending on the bank. Shop around for the best bank account options so that you can take advantage of the best deals. These may not necessarily be with your personal bank.
7. Register for Corporation Tax
After registering your company with Companies House, you’ll also need to register it for Corporation Tax within 3 months of starting to do business. This includes buying, selling, advertising, renting a property and employing someone. Failing to register within the 3 months can results in a penalty fine.
To register online, you’ll need your company’s 10-digit Unique Taxpayer Reference (UTR) which will be posted to your company address HMRC a few days after the company has been incorporated.
8. Register for VAT
VAT is a tax charged on most goods and services in the UK with the ‘standard’ rate currently at 20%.
If your business turnover for the previous 12 months exceeds the current VAT threshold level (currently £85,000 from 1st April 2017), then your company must register for VAT.
If you expect your turnover to exceed the threshold within the next 30 days alone, you should also register for VAT. You may also decide to register for VAT even if you don’t expect to reach the threshold.
Most contractors who run limited companies are registered for VAT. Not only does it give a professional impression to be VAT registered, but it will also enable you to reclaim any VAT you incur.
9. The CIS Construction Industry Scheme
The Construction Industry Scheme (CIS) is a tax deduction scheme which involves tax being deducted from payments related to certain types of construction work. The CIS covers most construction work to permanent or temporary buildings as well as civil engineering work like roads and bridges.
If you’re working in the construction industry as a subcontractor or contractor, you need to register with HMRC for the Construction Industry Scheme (CIS).
The scheme works by contractors deducting money from subcontractor’s pay and passing it onto HMRC. The deductions are counted as advance payments towards the subcontractor’s tax and national insurance.
You can apply for ‘gross payment status’ when you register for CIS if you do not want to pay advance payments.
It is compulsory for contractors to register and it is not compulsory for subcontractors to register, however they will have to pay a higher rate of national insurance.
Setting up a limited company is not rocket science, however, it is crucial you set it up correctly. Using an accountant to help you is recommended as they will have plenty of experience and will make sure you haven’t missed anything vital or done anything wrong.
An accountant will be able to suggest the right structure for your business which can affect tax, and add important conditions to your Memorandum of Association. As you will eventually need an accountant to assist with handling your annual tax returns, it makes sense to seek one out early on that can guide you from the start of your business.