For many people setting up in business it makes sense to form a limited company rather than going into business on your own account as an individual.
The process of setting up a limited company, also called a limited liability company, is complicated if you start from scratch. Luckily the process is set out online and it is possible to form a company in a few minutes.
There is more day-to-day administrative work involved in running a company, but overall the advantages are clear:
A company is a separate legal entity, this means that unless there is deliberate wrongdoing, the owners are not held personally liable for the company’s losses or outstanding debts.
A limited company is taxed at a lower rate than an individual and so you may pay less tax and National Insurance compared to running the business as a sole trader.
All limited companies must be ‘incorporated’ through Companies House, the government body which regulates all companies registered in the UK. Most companies are set up online directly with Companies House or via a formation service.
It’s possible for an individual to register a company using paper forms. This just takes longer and so it tends to costs more. For the modest sum they charge, using a formation agent is the quickest and easiest method. It is quite easy to set up companies incorrectly, and because companies are regulated according to the provisions of the Companies Act 2006 it can be surprisingly complicated to undo an error made on formation.
Many firms of Chartered accountants offer a formation service for their clients and so in most cases it is much easier to delegate the task of formation to your accountant.
Whether self-registering, or using the services of an accountant or formation agent, for a company to be incorporated you need:
A company name
The name must end with ‘Limited’ (or the Welsh equivalent). It must be unique to Companies House index of names, must not suggest a connection to any local or national government body, nor be offensive or contain any sensitive words (the latter unless with express permission).
A registered office address
This is the official UK address of the company, and the one used by HMRC and Companies House for all correspondence. The company does not have to trade from the registered address, and it can be a residential address. The registered address is published on the public register.
Details of at least one company director
Anyone over the age of 16 can be a company director, unless he or she has been made bankrupt or is disqualified by a court for holding a directorship. The details should include a service address (for correspondence; can be the same as the registered office) and a residential address if different from the service address. The service address will be available on the public register while the residential address is kept private.
Details of a company secretary (optional)
Some companies will appoint a company secretary to perform some of the necessary administration. If a company secretary is appointed, Companies House will need to be informed of his or her name and an official address. The address can be the same as the registered office, the director’s service or residential address, or one unique to the secretary. Company directors and the company secretary are together described as the company’s ‘officers’.
A ‘statement of capital’
This details the number of shares issued by the company and their total value. It also provides the names and addresses of all the shareholders, known as ‘subscribers’ or ‘members’.
The amount of capital that a subscriber contributes on incorporation can be as little as one share of 10 pence. In most cases subscribers will subscribe for amounts in whole pounds because this is much easier to account for. Once shares are issued the capital subscribed for remains locked in the company, so some careful thought is required as to what investment a subscriber should make. Shares may be issued following incorporation, but if a subscriber makes a mistake it can be costly to make changes to share capital because Companies Act rules must be followed. It is advisable to discuss share capital with a Chartered accountant before the formation process begins.
‘Articles of association’
This details the rules of the company as agreed by the shareholders and officers. It sets out how decisions are made, the officers’ responsibilities, and pays particular attention to the role of shareholders. Most companies use standardised versions articles of association, known as ‘model’ articles, although a company is perfectly entitled to make its own articles as long as they don't break any company law.
Unique Taxpayer Reference (UTR) and Corporation Tax
When incorporating online with Companies House you may go via a link to HMRC’s website and register for VAT. This is optional, and not always necessary. Within a few days of incorporation, HMRC will automatically send a letter containing a Unique Taxpayer Reference (UTR) to the registered office. The letter will also contain a list of information you must provide to HMRC together with instructions for setting up an online account for Company Tax Returns and Corporation Tax. You must reply to this letter no later than three months after incorporating the company. The information requested includes:
Whilst there may be some detail that we haven't covered in this guide, that detail will be largely relevant to specific situations. If you want to limit your personal risk whilst possibly lowering your tax bill, the above information will see you well on your way to correctly setting up your limited company.