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The third way to run a business is as a private company. The business is registered with Companies House and is an entity of its own. There are more rules associated with running a business this way but there may be tax advantages. Those involved have shares in the business proportional to their involvement. A limited company is regarded in law as a separate legal personality, distinct from its shareholders.
For this reason, if the company for any reason is unable to meet its liabilities, the shareholders will only be personally liable for the unpaid amount of their shares. If the shares are fully paid, then the shareholder cannot be asked to pay anything further.
The higher level requirements for limited liability companies are as follows:
When you set up your limited company, you have a legal obligation to tell HMRC that your company exists and is liable for tax. This is also the time to tell them who your accountant is. Often you will need to fill in a form to authorise your accountant to act on your behalf.
It is therefore, strictly speaking, incorrect to say that a company has limited liability; it is the shareholders whose liability is limited - up to the unpaid amount of their shares. This situation must be contrasted with the personal liability of a sole trader or a partner in a partnership (with the exception of a partner with limited liability or in the case of a limited liability partnership (LLP)). In these cases the sole trader or partner may be personally liable for any debts which the business is unable to meet.
As noted above, there may be instances when personal liability cannot be limited. This situation usually affects directors who may be personally liable if they have acted fraudulently of negligently. In particular, you should be aware of the personal liability which can accrue to directors if their company trades whilst it is insolvent.
Whilst the limitation of liability can prove attractive, you should be aware that in certain cases, notably when dealing with banks or other financial organisations, personal guarantees may be requested from the directors, and/or shareholders. This may then negate this particular advantage.
Filing Your Company Tax Return with the HMRC
Company Tax ReturnOnce a year you will get a notice from HMRC to file a company tax return. It's something that's worth putting in your diary each year, as it is your responsibility to fill out the tax return even if the notice doesn't reach you for whatever reason. It involves filling out a company tax return form CT600 plus sending off accounts information prepared by your accountant.
HMRC is encouraging businesses to do this online as much as possible. As well as speeding up the process, the tax calculations are done by the website. Many accountants use special software to prepare company tax returns, and submit them online for you.
Even though you are using an expert to complete your company tax return, it is worth you checking all of the details and ensuring everything is correct. Legally it is the company's responsibility to ensure the information sent is true and accurate. Moreover, it is you - not your accountant - that will have to pay any penalties for getting it wrong.
Who is Subject to Corporation Tax Requirements
The following limited companies and unincorporated organisations are subject to Corporation Tax requirements:
The taxable profits or surpluses of these businesses and organisations are subject to Corporation Tax requirements. A company or organisation subject to Corporation Tax requirements is known to HMRC for Corporation Tax purposes as being 'within the charge to Corporation Tax', 'chargeable to tax' or in 'the charge to tax'.
Who is Not Subject to Corporation Tax Requirements
Businesses and organisations that are not subject to Corporation Tax requirements include:
If your business or organisation is not subject to Corporation Tax, you do not need to meet Corporation Tax deadlines and requirements. This does not mean your business is exempt from all taxes, as you may have to complete a self assessment return.
Your business is self-assessed over accounting periods. For most businesses these are 12 months long and match the dates you have your accounts drawn up. It is possible to set accounting periods for less than 12 months, although not longer. Payment of corporation tax itself is due 9 months and one day after the company's "normal due date" - usually the last day of your annual accounting period.
Each tax return must contain your company name, registration number, the registered office and tax reference number. You will find this on the notice to deliver a company tax return.