You want to get your business up and running as soon as possible. And preferably without any fuss. Company formation can seem a bit daunting but it’s not as complicated as it may first appear.
In this article you’ll find an overview of what you need to know about limited company formation. There are also links through to more detailed posts that will give you all the information you need.
About Limited Company Formation
The first question you need to answer is, does your business need to be a limited company? No, not necessarily. There is no legal requirement to be a limited company and there are other business structures you can choose from. But there are several benefits to having a limited company.
The legal process of setting up a new limited company is known as incorporation. When your company is incorporated it has its own legal identity with its own rights and responsibilities and is responsible for its own debts. These are separate from yours and anyone else who manages it. Your company can enter into its own agreements, own property, and borrow money.
How To Register
In the UK you can form a limited company by registering it at Companies House. This process includes choosing a name, choosing directors and a company secretary, and deciding on who the shareholders are.
You can do all of this through a company formation agent. They will of course charge an upfront fee and for any add-ons for other services you might buy from them. There’s also a chance you won’t feel connected to the process and there is no requirement to register through an agent. There are a lot of forms and documents that need to be completed correctly but they’re not complicated and for most people setting up small enterprises, they can be completed relatively quickly.
The UK Government website includes a step-by-step guide to setting up a limited company. The templates of the forms and documents that you need for incorporation are all available on the Government website, together with the information you need at each stage of the process. The actual cost is £12 for an online incorporation and can take as little as 24 hours for the company to be registered.
When you register your company you’ll need to complete the registration form IN01. There are also two other documents that are required by Companies House. These are:
- Memorandum of association
- Articles of association
These documents are essentially the internal rules that govern the running of the company. If you register online, these can be in the form of default templates generated for you by Companies House as you go through the registration process.
Some of the benefits of incorporation
As we said earlier, there’s no legal requirements to register and carry on business as a limited company, but there are several benefits. The biggest reason most people decide to incorporate is that it protects your personal assets from the company’s financial liabilities. This is known as limited liability. Your home, car, and personal finances should all be protected if the worst happens and the company isn’t successful.
If you were to continue as a sole trader you would be personally responsible for all business liabilities.
Tax efficiency is another major reason to incorporate and carry on business as a limited company. As a director and shareholder, you can take income from the company in a combination of salary and dividends, which may reduce the overall amount of tax you pay.
You may also divide ownership of the company amongst family members, each of whom will have their own personal tax allowances and applicable tax rates.
This one might seem unfair! But potential clients, customers, suppliers and lenders might see a limited company as being more credible than a sole trader. You’ll also be able to raise money by borrowings secured on the company’s assets or new capital by the issue of new shares in the company to investors. And if you ever want to sell the business, the sale process will be simpler as the company is its own legal entity.
Business Name Protection
As a sole trader your name is not registered. Registering your company name with Companies House means no other company can use it as their business name. This protects you if someone tries to imitate your business.
If anyone does try this, you may be able to register an objection which (if successful) means the other company will have to change their name if Companies House agrees that it’s too similar.
It’s also important to note that you should choose a unique name for your company to avoid anyone registering an objection against you!
Are There Any Drawbacks To Having A Limited Company?
There are a few drawbacks. But ultimately these should be outweighed by the benefits that come from incorporation. If your business is quite small, it may be better to remain as a sole trader for tax reasons. Other than that, there are a few things you should know.
Your Information Is Public
Companies House will display some of your information publicly. This includes your name and company filing history, your filed accounts and your registered address. If you’re working from your spare room this could potentially mean your home address is available online. You can get around this by using a different address as the registered address of the company. This may cost you money to pay a formation agent or other service business to do this.
Whilst tax efficiency is one of the biggest advantages, that does mean more administration. Sole traders fill out a simple Self Assessment tax return but limited companies need to keep their books up to date and submit accounts every year. Many limited companies will use an accountant to help them, which is of course an additional cost.
VAT is a whole other issue that you might need to start thinking about when the company reaches certain turnover thresholds. You will need to register the company for VAT (and make regular VAT filings and payments) when the company’s annual VAT taxable annual turnover goes above £85,000. Below that, you may wish to register in order to recover input VAT on purchases that the company has made.
Other Information and Documents You Might Need
- Standard Industrial Classification (SIC code). Whats a SIC code? This is the 5 digit code that classifies your business’s main area of activity. If you’re “Gathering wild growing non-wood products,” that’s code 02300. Plasterers need code 43310, and of course we all know 51220 is Space transport.
- Registered address. This is the official address of your company and will be public. So if the company doesn’t have its own business premises and you don’t want your home address listed publicly, you will probably need to pay an annual fee to a professional (your accountant, if they do this) or other service business for the use of their address as the company’s registered office.
- Shareholders agreement. If you are in business with another person who is also a shareholder in the company, you would be well-advised to have a shareholders agreement between you. This will set out your agreement as to how the company will be managed and your relationship as shareholders. It will also deal with possible future events, such as what happens if one of you leaves the business (voluntarily or otherwise), you want to sell the company or the business is not successful. A shareholders agreement will also likely mean that you need to adopt the template Articles of Association with which the company was originally incorporated.
- Board minutes. are required if you have board meetings (meetings of directors). If there is only one director then this is likely not required unless you’d like to have a board meeting by yourself. Even so, you may be required to record certain decisions that you take as the sole director.
- Shareholder resolutions. These will be required if you make certain changes to your company and for certain business transactions. These include changes to the company name and share capital, amending the Articles of Association and making a loan or selling company property to a director.
- Company registers. You will need to maintain company registers, which are registers of certain information which company law requires you to keep up to date. These include registers of your company’s directors, shareholders and any other people who have a significant direct or indirect controlling interest in the company.
Every year you’ll need to make filings at Companies House. These include:
- annual confirmation statement, which confirms details of the directors, share capital and control of the company. Again, this can be done online and you need not pay a company formation agent to do this for you
- annual accounts, the form of which will be simplified if your company qualifies as a micro entity or a small company.
Other business structure options
Of course, incorporating and carrying on business as a limited company may not be right for you or your business. As we’ve said above, there are other options you might consider. These include:
- Sole trader. This is the simplest way to start and run a new business. You’ll keep all the profits after tax, but you are personally responsible for any business liabilities.
- Partnership. Carrying on business with one or more other partners, with the partners being entitled to their agreed share of profits but each being responsible for potentially all of the partnership’s losses and liabilities.
- Limited Liability Partnership (LLP). This is similar to a partnership but the members of the LLP have limited liability for the losses and liabilities of the LLP.
Company Formation With Paper Rock
We hope we have shown how you can take control over the process of forming your company and registering it at Companies House.
We have various template documents available on our website that you might need once your company is incorporated and to run and administer your company on an ongoing basis. Each document is accompanied by a guidance note which explains its purpose and how it should be completed.