Forming a Limited company with outside investment - first steps?

[cyborg10]

I'm about to start up a new business (having previously been a sole trader in a slightly different industry) and could do with a few pointers as how best to get this under way within the next week or two.

The new business will be a limited company. I will be the sole director and employee. There will be two shareholders; myself (70%) and my brother (30%). My brother will be investing £10,000 in the business which will be the total starting capital for the business, to pay for equipment and a modest wage to myself for the first few months until the business starts to make money.

What would a basic plan of action be to get this under way? I know I need to:-

* Register the company with Companies House
* Issue shares to myself and my brother
* Open a business bank account
* Transfer the £10,000 investment from my brother to the new bank account

Is there a preferred order to these events? Will a bank even let me create a new account for a limited business before it's registered with companies House or should that be step 1? I was hoping to have the funds in the bank available for paying any setup fees, etc.

Am I crazy to think I can do this myself without an accountant? If I were to employ the services of an accountant to take care of this, what would be regarded as a realistic fee? Anything I am overlooking?

As you can probably tell, I am trying to minimise costs as much as possible!

 

[Paul_Rosser]

When I setup my business the bank wanted to see the incorporation certificate issued when you register with companies house, so would suggest you do this bit first.

Most banks will give you free setup and 2 years free banking, so no need to worry about their fees.

If you have to spend any money prior to having the business bank account ready then just record all of it and you can take it out of the £10k you will be depositing once it's there.

Why are you putting money into the company just to draw it as salary ?
Why not keep whatever you need as a salary for the first few months out of the business account ? If your brother would rather the cash in the business bank account then when you take it out mark it as "loan repayment" and not salary as otherwise this will eat into your personal allowance.

If you just want a company setup there there are lots of online services which don't charge much (less than £100) for company formation, however if you actually want an accountant who will set the company up and then do your business/personal accounts, offer advice etc. Then these range from a couple of hundred for an online service, up to about £1200 if you want an accountant you can actually go and see.


Have you considered how you are going to pay yourself moving forwards ? Salary ? Dividends ? Mixture of the two ? An accountant will be able to advise the best and most tax effective way.

 

[Yorkshire&Online]

You will need to register the company first before before opening a bank account.

You can pay the cost privately then claim it back from the company later (although set up fees for a company are a capital cost).

Beware of the online set-up companies. Many offer a cheap fee but don't do all the statutory record preparation eg minutes of the first meeting, fill in your statutory registers etc.

If you have no accountancy or bookkeeping experience, you will find the whole reporting to Companies House, preparation of statutory accounts etc a bit of a headache. Accounts and tax for a limited company are a totally different proposition to a self employed person.

A good accountant should offer bookkeeping help throughout the year as part of a fixed fee if you want to do that bit yourself, but you will save time and most likely tax and money by engaging an accountant to look after your tax and financial reporting. They will point out things you have never even thought of and put you back on the right path when you veer off it!

If you want an idea of realistic fees for a small limited company, take a look at what we charge for an idea:

http://www.brown-royd.co.uk/services/online-accountancy-and-bookkeeping/online-accountancy-charges

 

[Paul_Rosser]

I haven't used Brown Royd personally but their pricing looks pretty good.

A good accountant will be able to advise on how to reduce the tax you pay both for the company and you personally, so their fees are often covered by the savings you make.

Oh one other thing, have you got a shareholders agreement ? You may want to consider as your minority shareholder is putting all the cash in, this would list how/when they are repaid etc.

 

[cyborg10]

Thank you Paul and Yorkshire, some very good advice there.

With regard to not putting the whole 10k into the business so that I can feed myself, pay rent, etc, without paying myself a salary... does that have any legal ramifications? I mean, would the money that I keep aside from my brother's investment still be seen as some kind of income to me (and so need to be declared)? Or can I just treat it as a family gift as such?

I'm certainly not against paying out for an accountant to manage my books, in fact I would prefer this in the long run and I know the advice and tax savings alone will make it worthwhile on it's own. However, the reason I am/was tempted to avoid having an accountant on the books straight away, is because the first 6 months of my business will have very little trading. My first product (software) will not officially go on the market until around July / August so there will be virtually no income until then and the only outgoings are going to be some initial IT purchases and minimal monthly expenses of a home office. Being on quite a tight budget, I was hoping I could save the ~£45/month accountancy fees during these first few months. Or is it naive of me to think that?

As for paying myself, in the long run I hope to draw a modest salary at first, plus some dividends, whatever works best to reduce tax. This is certainly an area I could do with advice on.

I do plan to have a shareholders agreement. My brother and myself had planned that my brother's £10,000 investment would not be paid back. Instead, his investment will get him 30% of the shares and he would, in time, make his money back from dividends. Does this sound appropriate?

Online accountant vs one I can go and see... are there major advantages in choosing one local to me that I can visit? I know it may offer some peace of mind being able to talk face to face, but I am guessing this will also be more expensive.

I'm probably coming across as a penny pincher! but really I'm just trying to keep a handle on my costs until I get past the first few months of operations and start making some actual income. If I can delay some expenses until then, all the better, but I also don't want to make too much more work for myself by not paying for outside services.

All advice is very, very much appreciated! _

 

[Paul_Rosser]

Thank you Paul and Yorkshire, some very good advice there.

With regard to not putting the whole 10k into the business so that I can feed myself, pay rent, etc, without paying myself a salary... does that have any legal ramifications? I mean, would the money that I keep aside from my brother's investment still be seen as some kind of income to me (and so need to be declared)? Or can I just treat it as a family gift as such?

It can just be a gift, so wouldn't need to be declared. Only issue may be with inheritence tax if he dies, but I wouldn't worry about that for now.

I'm certainly not against paying out for an accountant to manage my books, in fact I would prefer this in the long run and I know the advice and tax savings alone will make it worthwhile on it's own. However, the reason I am/was tempted to avoid having an accountant on the books straight away, is because the first 6 months of my business will have very little trading. My first product (software) will not officially go on the market until around July / August so there will be virtually no income until then and the only outgoings are going to be some initial IT purchases and minimal monthly expenses of a home office. Being on quite a tight budget, I was hoping I could save the ~£45/month accountancy fees during these first few months. Or is it naive of me to think that?

Thats not a problem, just make sure you keep your records in order. Keep a track of what you spent on the business, keep receipts for everything purchased and when you do start making money ensure that you don't take any dividend payments without correctly accounting for the Corporation Tax due.

I work with a lot of software startups and as cashflow is usually an issue a lot don't engage with an accountant for the first 6/12 months.

However I would use an accountant to file your accounts at the end of the year and offer you some advice as they will be able to ensure you don't pay more tax than you should.

As for paying myself, in the long run I hope to draw a modest salary at first, plus some dividends, whatever works best to reduce tax. This is certainly an area I could do with advice on.

Most directors/shareholders in smaller companies pay themselves up to their tax free allowance (about £8k) and then pay the rest via dividends as this is usually the most tax efficent way.

Say for example the company makes 40k profit in the first year, you would pay yourself £8k as a salary without paying any tax, this then leaves £32k profit so you pay corporation tax on this of £6,400 (20% of £32k) leaving £25,600 which you can pay yourself as a dividend without attracting any more personal tax. So you get as a total for the year £33,600.

Dividends can be paid at any time during the year, but can only be taken from profit and once corporation tax has been accounted for.

I do plan to have a shareholders agreement. My brother and myself had planned that my brother's £10,000 investment would not be paid back. Instead, his investment will get him 30% of the shares and he would, in time, make his money back from dividends. Does this sound appropriate?

It does, however you may want to reconsider that, as in my previous bit dividends are paid from profit and after corporation tax is paid, if your brother puts £10k into the business as a loan then he is free to take this back out at any time without having to pay any tax.

Online accountant vs one I can go and see... are there major advantages in choosing one local to me that I can visit? I know it may offer some peace of mind being able to talk face to face, but I am guessing this will also be more expensive.

Comes down to personally preference really, you get good and bad with both.

Personally I would be looking for an accountant who has experience of dealing with clients of your type (software) as they should be more aware of different tax rules you can use to minimise your tax. Things like R&D tax relief which applies to a lot of software firms, can only think of that one as it's what my company does

I'm probably coming across as a penny pincher! but really I'm just trying to keep a handle on my costs until I get past the first few months of operations and start making some actual income. If I can delay some expenses until then, all the better, but I also don't want to make too much more work for myself by not paying for outside services.

All advice is very, very much appreciated! _

Nothing wrong with penny pinching and it's always a good idea not to stretch your finances too far when you start.

However some things are well worth paying for a good accountant is one of them, but as you won't be trading in the first few months you shouldn't need one till then.

As I said before and I can't stress this enough, just make sure you keep proper records/receipts, this can be simply on an excel spreadsheet but it's amazing how many people don't and then end up in trouble when it's time to file their tax returns.

 

[Yorkshire&Online]

Paul has pretty much summed things up in his post for you.

My only advice would be this:

You will wind up paying the same fees to an accountant regardless of whether you pay them monthly from the start or as a lump sum at the end of the year. In fact you may end up paying more if you leave it 12 months and you haven't kept your records adequately and nobody has shown you what records to keep and how best to claim certain types of expenses eg travel and subsistence for example and other tax free payments that you can make to yourself as director.

I understand your concerns regarding cash flow and maybe that might put you off setting somebody on straight away, but if you can find space in your budget, I would recommend it.

I know I sound biased, but I also have had many experiences of trying to put things right for new clients who come to me 18 months down the line and haven't taken any advice, and the difficult conversations we have to have!

If you specifically want to speak to someone face to face, then go for a local accountant. If you are not that bothered, go for anyone you have faith in! Even with a local accountant, most work is done over the telephone and internet anyway and unless you specify otherwise, you will most likely only see your accountant once or twice a year to finalise the year end.

Oh, and I might be a little more conservative about treating the 10K as a gift from your brother, but then that's me!

 

[Philip Hoyle]

Re online/face to face accountants, it's really your personal preference. Are you happy dealing via email/telephone or are you the kind of person who prefers to talk face to face with people? Either way works, but you need to know what will work for you.

Have you and your brother considered whether his £10k investment could be made under the new SEIS scheme - http://www.seis.co.uk/

If the circumstances are right, he could get £5k tax relief on his investment, which would also be free of CGT when/if he sells his shares for a profit.

 

[Yorkshire&Online]

Have you and your brother considered whether his £10k investment could be made under the new SEIS scheme - http://www.seis.co.uk/

Yes, well spotted by Phillip! And that would definitely need to be done properly at the start.

Proof (if any was needed) that professionals don't just bring a cost to your business!