The Role of Director
When you set up a limited company, you will need a director (or directors.) Directors are the people at the top of the company who oversee operations and who make all of the daily decisions on behalf of the company. They are also people who have the legal responsibility of managing the company and who are bound by a number of legal obligations and rules of practice.
If you set up a limited company and are the director of that company, then you need to realise that the company becomes a separate legal entity with its own legal rights and obligations and with all the losses and profits belonging to the company, not you. As director therefore, you always need to remember that the company is its own legal entity and that you are acting on behalf of the company, not yourself. You are an employee of the company and the shareholders are the owners.
What's covered on this page
- Everything You Need To Know About Running a Limited Company.
- The Role of Director
- Who Is Eligible To Be a Company Director?
- What Are The Duties of A Director?
- Follow the Articles of Association
- Exercise Care
- Act for the Company
- Avoid Conflicts of Interest
- Keep Good Records
- Directors and Tax Duties
- Setting up PAYE and registering the company for Corporation Tax
- Paying VAT
- Filing an Annual Tax Return
- Filing the Company’s Annual Financial Statements
- Filing the Company’s Corporation Tax Return
- Fines and Penalties
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Who Is Eligible To Be a Company Director?
Anyone can be a company director, so long as they are at least 16 years old and so long as they don’t have a history of bankruptcy or a court order prohibiting them from doing so. Basically there are no qualifications or certificates needed – anyone can do it! Moreover, even if you have been declared bankrupt before, it is possible to get a court to give you permission to become a director under certain exceptional circumstances.
What Are The Duties of A Director?
As mentioned above, there are a number of legal obligations that come with being a director and the director always needs to keep in mind that their number one duty is to the company. This means that they need to put the legal entity of the company above their own interests and the interests of the shareholders (even when the director is the sole shareholder.) This section will cover the essential duties of any director:
Follow the Articles of Association
A director must always run their company according to the rules and laws that are set out in the company’s Articles of Association. These Articles of Association are the guidelines that were set out when the company was formed and they provide a roadmap as to how decisions should be made. The shareholders and director agreed to follow these articles when the company was formed.
A director has a duty to exercise a reasonable amount of diligence, skill and care in their running of the business.
Act for the Company
A director must always act for the benefit of their company, and not for themselves. This can seem a little confusing if the director is also the only shareholder and employee but it is an important distinction. For example, there may occasionally be a decision that would benefit the director personally but which would have negative consequences for the overall company. In such a case the director would be expected to act on behalf of the company.
Avoid Conflicts of Interest
Directors must notify shareholders of any potential conflicts of interest (such as a personal gain from a decision.) They must always make decisions independently and cannot accept any kind of benefit from any third party that might influence their decision.
Keep Good Records
A director is required to keep transparent and honest records of their company’s accounts and to reflect the company’s finances accurately. They are legally required to keep those records for 6 years from the Year End date of the company – failure to do so can leave the company liable to a £3000 fine. They are also required to report any changes of address (both of the company and the shareholders) to HMRC. Lastly, they must register and then file their tax returns every year (discussed in the next section.)
Directors and Tax Duties
One of the many duties of a director is ensuring that the company registers for all the relevant and correct taxes required by HMRC and that the company submits accurate returns to Companies House and HMRC on time. This section will look at the obligations and returns for which the director is legally responsible:
Setting up PAYE and registering the company for Corporation Tax
This will mean that PAYE then becomes automated so that every time the company pays an employee, HMRC will be notified via real time information software.
A director must VAT register (with HRMC) any company that is likely to be earning more than the VAT threshold for a period of 12 months. They can also voluntarily register for the VAT flat rate scheme with HMRC at any time. Once registered a director will need to account for their company’s VAT. They can do this via a number of different payment plans or schemes, the most common of which is a quarterly payment scheme.
Filing an Annual Tax Return
In the first 12 months and 28 days from the company’s formation a company must file a tax return to provide an overview of the company’s financial information. It must then do this every year thereafter.
Filing the Company’s Annual Financial Statements
By the end of the accounting year the company must file its annual financial statements to Companies House.
Filing the Company’s Corporation Tax Return
By the end of the accounting year the company must file its annual Corporation Tax Return to Companies House. The corporation tax then has to be paid by 9 months and 1 day after the end of the accounting year.
Fines and Penalties
Unfortunately, if a director doesn’t take these obligations seriously they can end up being disqualified from their post as director of the company and also face fines of up to £5000. This £5000 is per each offence that they commit and it is very real – more than 1,500 directors a year are prosecuted for failure to submit their returns on time or failure to submit adequate returns. Additionally, these fines can escalate if the filing of those returns gets later and later!