Are you thinking about starting your own online business? Are you wondering about whether or not you should start by forming a limited company or to just get going straight away as a sole trader? Are you interested in finding out more about limited companies? This article looks at what is a limited company and some of the other basics around them.
As accountants for Amazon FBA businesses, we often get asked all sorts of questions relating to limited companies and sole traders by people looking to get started online. The most common are: what is a limited company, how is a limited company taxed and what are the filing deadlines for a limited company.
This is an article covering the basics. In our upcoming articles, we will look at what is a sole trader, then things that are slightly more advanced, such as the advantages of a limited company vs sole trader and a breakdown of the tax implications for a limited company versus those of a sole trader. If you have any questions about limited companies or sole traders, then please contact us.
Accountants for Amazon Sellers
We are accountants for Amazon Sellers and we pride ourselves on helping ecommerce entrepreneurs succeed by making things as simple and stress-free as possible. If you are looking to start an Amazon FBA business or if you are looking for an accountant that understands your business, then you should get in touch with us by using the Instant Quote feature.
We can help you form your own limited company, guide you on how to register as a self-employed sole trader with HMRC or even help you get registered for VAT.
What is a limited company?
A limited company is an entity that can be formed in order to carry out a business or trade.
In legal terms, a limited company is considered as being its own distinct/separate legal entity. Essentially, what this means is that when a limited company is formed, it becomes its own person. Meaning that it is responsible for its own obligations, such its commitment to a purchase agreement and can own its own assets, such a cash in a bank account or its own property, plant and equipment.
A limited company is owned by its shareholders and is run by its directors.
The shareholders of a company can also be directors of the business. In fact, most new companies are known as “one man bands” because they are owned and operated by a single person that is trading through this legal entity.
The directors of a limited company have legal duties and responsibilities that they must carry out. If they breach these, including if they carrying out illegal activities, such as fraud or theft in the name of a limited company, they may find themselves facing criminal charges and still being held personally liable for their acts.
What are the responsibilities of a director?
Directors of limited companies must:
- Keep company records, including those that relate to all money received/spent, stock takings used to work out annual stock figures and who you bought and sold things to/from.
- File company accounts and a company tax return.
- Pay corporation tax.
- Register for Self Assessment and pay personal taxes (if they have any income that they need to declare).
Although directors are legally responsible for these duties, the majority choose to outsource these functions to professionals who will manage these things for them.
If you run an ecommerce business and would like us to manage your limited company obligations, then please get in touch.
How is a limited company taxed?
A limited company pays corporation tax on its year-end profits. Currently, the corporation tax rate is a flat 19%.
This means that if a business makes £10,000 in profit, it will need to pay £1,900 in corporation tax.
What happens to the money in a limited company after it is taxed?
This money that is left over after tax is known as retained earnings. It may be left in the business to fuel further growth, or it may be extracted as to the shareholders in a dividend payment. Find out more about dividends here.
When is a limited company’s financial year end and what are its filing deadlines?
Each limited company will have a different financial year end. This is usually based on the end of the month that the business is first formed (although this can be altered).
The filing deadline is usually 9 months and 1 day after the financial year-end.
For example, if you formed your limited company in March 2018, then your financial year end is likely to be March 2019. Your filing deadline would then be December 2019.
If you want to look-up your company’s financial year-end and its subsequent filing deadline, you can do so by typing in its name here on Companies House.
What are the tax advantages of having a limited company?
Before the tax changes on dividends in 2016, limited companies used to be incredibly tax efficient. However, since these changes the tax advantages have slowly been eroded to the point that things are actually almost tax neutral (sometimes actually negative!) when it comes to extracting income from a limited company.
If you are interested in seeing how this works, we will be discussing the tax implications on limited companies vs sole traders in a later article.
Hopefully, that answers the question “what is a limited company” and also any other basic ones that you may have had around them. However, we are always looking to improve our content, so if anything is not clear, or you have any other questions. Please get in touch with us today.
Amazon FBA Accountants
We are accountants for Amazon FBA businesses. If you are a seller on Amazon, a drop shipper or carry out retail arbitrage and are looking for an accountant in the UK who specialises in working with ecommerce, then get in touch using the Instant Quote feature.