How do I become a limited company? Should I?

Many e-commerce enterprises begin life with a solopreneur and due to ease of filing, they are often registered as a sole trader business. But as your business develops you may wonder “how do I become a limited company?”.

You can register your e-commerce business as a limited company straight out of the gate or at any point in its life, but once you have registered your filing responsibilities must be completed or you will be penalised.

So, why should I become a limited company?

The word limited refers to the limited liability a company has. Should your e-commerce company attract a lawsuit or accrue unsustainable debts, it is the company, not you, that is liable. No business owner should go into business expecting these events to occur, but limited liability is a nice insurance policy to have.

If you choose to register your e-commerce business as a limited company, you will become a director. As such, the tax implications may be favourable. An e-commerce accountant will be able to assess whether you will pay more tax as a sole trader or a director as factors such as income and allowable expenses can make a difference.

E-commerce businesses can get lost in a sea of competitors when they are starting up so many business owners turn to tricks to boost the illusion of scale. Simply put, being “Mementos for Mum” does not have the same gravitas as “Mementos for Mum Ltd”. This is the same rationale that leads many to register for VAT voluntarily.

How do I become a limited company?

Registering a limited company is a fairly straight-forward process with registration fees a nominal £12. But before you jump into the HMRC portal, there are a few decisions to be made.

1. Choose your directors and secretary

You may be a solopreneur and you may intend to stay that way but if you are looking at bringing in additional directors, make sure to solidify the decision and document these. You will also need to choose a Company Secretary.

2. Issue shares

Again, it may be that you are the only shareholder, but it is still necessary to document the process. Create a simple Statement of Capital that outlines the shares held by the relevant parties along with their full names and addresses.

3. Create your Memorandum and Articles of Association

These are the rules of how your business will be conducted. In your Memorandum of Association, all shareholders, directors, and the Company Secretary must sign to approve the formation of the company. The Articles must include responsibilities of the parties, how decisions will be made, how dividends will be paid and many other areas. You can use the HMRC examples as a basis to create these or get your accountant to do so for you.

Once you have these pieces in place, you can register as a limited company. There are rules on how you can name your company, and you may have to try a few variations before you find a name that is available.

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Corporation Tax & PAYE

As you work your way through the registration process you will see options to register for Corporation Tax (mandatory) and PAYE (applicable if you will have any employees).

Benefits of setting up a limited company

While the potential for financial savings is a significant draw for those considering setting up a limited company, there are a few other key areas that can benefit you and your business:

• When you register as a limited company, you are only liable to pay tax until the end of the tax year, giving you a much clearer outlook over your company profits. This can be especially beneficial for businesses who rely on seasonal demand or experience irregular income.
• You may find you can save cost on company vehicles as you will be required to pay less tax on some specified business vehicles.
• There is a reduced risk of personal liability when registering as a limited company. Unlike operating as a sole trader, you and your shareholders are only liable for any debts up to the value of your share, reducing the risk of your personal assists being seized to pay for business debt if the company fails.
• Businesses registered as a limited company are often perceived as having a higher business profile and being more substantial than those operating as a sole trader, increasing perceived consumer value, trust and reliability. This may also help when securing investment or attracting additional funding opportunities.

Accounting for a limited company

Now you have successfully registered your e-commerce business as a limited company, it is important that you review your accounting systems to make sure they are sufficient. Accounting for a limited company is much more stringent. You can read the full list of requirements here.

We highly recommend using Xero for your e-commerce business whether you are a sole trader or a limited company. It is purpose-built for e-commerce and will ensure your accounting records are as they should be.

Next Steps

If you would like us to register your e-commerce business as a limited company or advise you on whether it if the best choice for tax purposes, get in touch with our team of e-commerce accounting specialists.