When you incorporated your Limited Company, the chances are you put your own name down as both the Director of the company and the main shareholder.
Trading through a Limited Company is different to being self-employed. This is because you have created a separate legal entity to yourself. Your Limited Company will have its own paperwork to complete. As well as its own money, customers and debts.
Whilst one of the main appeals of having a Limited Company is the knowledge that your personal assets, such as your house, is safe should your business not perform as well as expected, mismanaging your Limited Company can come with its own negatives.
In this blog, we will run through some of the directors’ duties that you need to be aware of.
What is a Director and what do they do?
It may be worth noting that a Director does not own a Limited Company. The Director is an employee of a Limited Company whose primary role is to promote the success of the company.
In this instance, the success of the company is defined as increasing its value. This means running the company so that it makes a profit whilst ensuring its ongoing viability.
Your role a Director includes:
· looking after any other employees
· building relationships with customers and suppliers
· maintaining the reputation of the company
· considering the long-term consequences of all business decisions
If a Directors doesn’t own the Limited Company, then who does?
A Limited Company is owned by its shareholders, and therefore, exists predominantly to create profits which the shareholders can extract as income via dividends.
A director is appointed to run the company so that it makes this profit for the shareholders.
This means that if you are the sole director and sole shareholder you can take a mixture of salary and dividends from your company.
It is always worth noting the difference in the roles of a Director and a Shareholder as it can be tempting to give shares to spouses, partners and family members as a method of tax planning. Whilst this is popular and certainly worth considering, you need to be aware that you are also giving them partial ownership of your company.
What will I need to do from a financial point of view when I start my Limited Company?
As soon as you have incorporated your Limited Company, it is worth ensuring that you have a bank account set up. This bank account must be in the Limited Company’s name and not your own.
If you set up a bank account in your own name, the money in it will belong to you and not your Limited Company. The result will be that any money in the account will be treated as though you have taken it out of the Limited Company and the tax consequences of this can be substantial.
As well as the bank account, any start up loans, investments and finance agreements also need to be in the Limited Company name. If you take out a loan in your own name, then the debt will belong to you. This will mean that any payment defaults will be yours and the protection that you may have sought from trading through a Limited Company will be lost.
What accountancy related requirements will I have as a Director?
Your Limited Company will need to complete a set of annual accounts and file its own company tax return. Companies House and the corporation tax liability will be due nine months after the Limited Company’s year end. HMRC will need the company tax return and attached accounts within a year of the company’s year end.
Every year, on the anniversary of the Limited Companies incorporation, Companies House will need to be advised on the current directors and shareholders through a confirmation statement (this used to be called an annual return).
As a Director, you may also need to complete your own self-assessment tax return. Sometimes HMRC will issue you with a notice to compete a tax return automatically but on the occasions when this doesn’t happen, you will need to register yourself once you have income that will incur a tax liability. If all your income is taken as a salary through PAYE then your tax will be paid at source, but dividends will need to be declared through a tax return.
What should I do if I don’t understand the financial side of the business?
One of the legal requirements of being a Directors is that you should always exercise reasonable care, skill and diligence.
It can be tempting to simply sign your Limited Company accounts on the understanding that they must be correct if you have paid an accountant to prepare them for you. This legal requirement (known as regulation 25 under Company law) means that you will be ultimately responsible for anything that is submitted to HMRC and Companies House.
Before you get unduly worried, this does not mean that you need to become an accountant or undertake any financial training. What it does mean is that you need to show an interest in your finances and question anything that you are unsure of.
We highly recommend that you engage the services of an accountancy firm who takes the time to explain your accounts to you and answers any questions you might have. Having a meeting to discuss the accounts rather than blindly signing them, will help to ensure that you have demonstrated reasonable care.
Will my house really be safe if my company gets into financial difficulty?
Sometimes the knowledge that your personal assets are safe can give you the confidence to take more risks than you may do if you were self-employed. Maybe you would pay a supplier or a tax bill a little quicker if the debt collectors were going to come directly to your house.
There are times however, where the veil of incorporation can be lifted.
If it is discovered that you have continued to trade whilst knowing that the company will be unable to pay its suppliers, this is considered fraudulent trading.
The result of trading fraudulently can include being disqualified as a director for up to 15 years. The veil of incorporation can also be lifted, meaning that your personal assets can be seized to repay the debts and in serious instances, it can also be considered a criminal offence.
Not knowing the finances of your company will not be considered a reasonable defence as this related back to regulation 25 that we mentioned earlier.
Having some form of bookkeeping undertaken on a regular basis will help you to keep an eye on how the business is performing. Keeping personal expenditure away from the business bank account will also help you to monitor cash flow on a very basic level.
If you are a Director of a Limited Company and would like to understand your Directors duties and your Company’s finances even more than you currently do, please contact us to arrange a meeting.