Setting up a limited company in the UK is one of the best ways to run your online business while working towards EU second citizenship.
It offers the key advantage of being able to extract your income as dividends, which are considered passive income. This opens the possibility of using passive income residency pathways as a route to citizenship.
In the UK, setting up a limited company is an affordable and easy process. You can either do it yourself or hire an incorporation agent to do it for you.
The UK has a relatively low corporation tax rate of 19%, although this is set to increase to 25% in 2023.
The 19% rate will still apply to businesses making less than 50,000 GBP a year in profit, with marginal relief available for profits of up to 250,000 GBP per year.
What is a limited company?
There are three types of business structures in the UK: sole trader, partnership or limited company.
Limited company. Here, ‘limited’ means that you as an individual have limited liability for the debts of your business. The director (you) and the business are separate legal entities. This protects your personal wealth from anything that might go wrong with the business.
A limited company involves more management and reporting responsibilities than a partnership or a sole trader, so many directors hire an accountant to manage these aspects. This typically costs around £800-£1000 a year for a small limited company.
Importantly, a limited company is the only structure where shares are issued and you, as director, can extract most of your income as dividends (i.e., passive income). This makes it the best fit for emigration to the EU, as it allows access to passive income residency options.
What are dividends and why are they important?
A dividend is a payment that a company can make to shareholders if the company has made a profit.
As the director of your limited company, you can be the sole shareholder, hence all dividends can be paid to you. You can then use these dividends as a form of income, which is classed as passive.
If you can secure several regular clients, for example as a copywriter or web developer, then you can establish a regular pattern of dividend payments, which you can then use as your main source of income while living in the EU.
This is an important consideration if you become resident in Portugal, because dividends from abroad are typically free of tax under Portugal’s non-habitual residency (NHR) tax scheme. Check out our full guide for more details.
Setting up a limited company vs sole trader vs partnership
So how does the limited company structure compare to other business structures available in the UK?
Sole trader: This is very simple to set up and manage, but the downside is you’ll be held personally responsible for any of your business’s debts. This is because you and your business are the same legal entity.
What’s more, a sole trader can’t extract profits as dividends. This makes the UK sole trader structure poorly suited for use in combination with special tax programs such as Portugal’s non-habitual residency, or for passive income visas. That’s because dividends are typically considered a form of passive income.
Partnership: In this structure, two people form a partnership and run the business together. They share responsibility for the business debts and for keeping its accounts in order. But because a partnership doesn’t issue shares, you can’t extract your income as dividends.
What does a limited company director do?
When setting up a limited company, you will take on the role of company director. This role comes with certain responsibilities that you should be aware of.
The company director handles day-to-day business activities and finances, ensuring all statutory filing obligations are met and that the company is run according to the Companies Act 2006, the articles of association, and the shareholders’ agreement (if one exists).
The director must also use their skills and experience to try and make the business a success.
Does setting up a limited company work for one person?
Yes, you can be the director, sole shareholder and sole employee of your limited company. However, this may have tax implications for you while living in the EU, due to the “effective management rule”. We’ll discuss this in detail in an upcoming article.
Does the director need to be a UK resident?
No. The director of a UK limited company can be resident anywhere in the world. But the company itself (which is a separate entity) will always be located in the UK, for tax and legal purposes.
How much does setting up a limited company cost?
Setting up a limited company can be done in several ways, either through a formation agent, or by yourself through Companies House. The latter way is easy and low-cost. It costs just £12. You can pay with credit or debit card or PayPal, and your company is usually registered within 24 hours.
Running costs are usually low for a lean online service-based business such as consulting, coaching, freelance writing, or programming.
The three main areas of expense for a UK limited company in these categories ar:
- Accountancy fees,
- Corporation tax
- Business expenses that you might incur during the running of your business (such as software, travel, or client entertainment).
You might also want to use a registered address service to hide your home address from the public record (all UK companies must be listed online on the Companies House website, including names and addresses of all directors, including non-residents).
UK corporation tax is currently 19% of your business profits. You can reduce it by expensing as many things as possible, but these must be legitimate business expenses as defined by HMRC.
NB, you can’t count dividends as business expenses when you work out your Corporation Tax.
What’s the process for setting up a UK limited company?
Check the company name is available
When setting up your limited company, you’ll need to choose a business name. Whatever name you choose must be unique. If it’s too similar to another company’s name or trade mark, then someone may complain and you may have to change it. Limited company names in the UK typically end in ‘limited’ or ‘Ltd’.
There are additional rules for naming your company, with a full list available here.
Companies House is the place to go to check name availability.
Appoint directors and company secretary
It’s required to have at least one director, but you don’t need to have a company secretary unless you want one.
You need at least one shareholder or guarantor when setting up a limited company. This can be a director. For a one-person limited company, you can be the sole shareholder.
Choose the people with significant control over your company
This usually means those who hold:
- more than 25% of shares in the company
- more than 25% of voting rights in the company
- the right to appoint or remove the majority of the board of directors
As a sole director and shareholder, you’ll be the person with significant control. However, a company can have one or more PSCs, and you need to let Companies House know who they are.
Prepare documents about how to run your company
There are two basic documents required when setting up a limited company in the UK:
- ‘Memorandum of association’ – a legal statement signed by all initial shareholders or guarantors agreeing to form the company
- ‘Articles of association’ – written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary
If you incorporate your company online, your memorandum of association will be automatically created so you will not need to write it yourself. For the articles of association, the easiest way is to use ‘model articles’, which act as a standard template. If you’re setting up a simple limited company for your online business, we recommend using the model articles rather than trying to write your own.
Check what records you need to keep
As company director, one of your responsibilities is to keep records for the business. These include records about the company itself, as well as records about the company’s financial situation and its accounting records.
It’s usually a good idea to hire an accountant to take care of the financial side of things, leaving you free to focus on running and growing the business. In addition, we recommend using online accounting software like QuickBooks or Xero, to invoice clients and keep track of expenses.
Here’s the full list from the UK government website of all business records that you’ll need to keep.
Register your company with Companies House
The final step is to register your limited company with Companies House, the government agency that handles everything to do with limited companies in the UK. The first thing you have to do is choose an address for your registered office.
This address will be publicly accessible on the Companies House website. Some people use their home address for this, but for security reasons we highly recommend instead using either your accountant’s address or the address of a formation agent, such as Rapid Formations. You can use this address on your invoices as well.
Finally, you also have to choose an SIC code, which categorizes the nature of your business. You can see the list of SIC codes here.
Congratulations! You’re now the director of a brand-new UK limited company. This is a great vehicle for extracting your income as dividends, which will be extremely useful for your new life in the EU.
To find out which EU countries offer residency by passive income, take a look at our round up.