Are you thinking of setting up a limited company for your business? Here’s everything you need to know about the pros and cons of forming a limited company and how to register your business as a limited company.
New businesses typically fall into one of three types: sole trader, partnership or limited company. Each has its advantages, but if you want to grow your business significantly, shield personal assets from liabilities and employ staff, then forming a limited company is the best option.
- Why set up a limited company?
- What is the difference between a private and public limited company?
- Legal requirements for limited companies
- How do I set up a limited company?
- Register a limited company yourself
- Using a company formation agent
- What documents are needed to form a limited company?
- How to choose a registered office address
- What should I do after registering a limited company?
Why set up a limited company?
Registering and running a limited company involves more paperwork and accounting than a sole trader business or partnership, but this is offset with extra protections in terms of financial liabilities.
A limited company’s liability is just that: limited. Deemed to be its own legal entity, it can own property and assets, incur debts, sue and be sued but its finances are completely separate from the personal finances of its owners. This means that should the business fail, neither you nor the other owners can be held responsible for any of its debts. Unlike sole traders or business partnerships, a limited company is a good way to run a business without any risk to personal wealth or assets.
Ownership of a limited company is divided up into equal shares which are then allocated to each shareholder. A limited company can be set up by a single individual who will be the sole shareholder and company director, or by multiple shareholders.
Advantages of forming a limited company include:
- Liabilities such as debts or legal action are limited to the company. You are protected from going personally bankrupt in the event the business fails, apart from in some rare circumstances.
- If you plan to employ staff, it’s better to form a limited company and pay salaries via the Pay As You Earn (PAYE) scheme.
- Corporation tax on profits is lower than the higher rates of income tax that a sole trader will pay.
- As its own legal entity, it’s easier to sell the business later or to sell shares in the business to raise capital.
- A limited company is perceived as a bigger, more professional organisation, which is important if your clients are primarily other businesses or government organisations.
What is the difference between a private and public limited company?
Both private and public limited companies are owned by shareholders who are investing in the company, but there are several differences; most of them relate to the fact that a private limited company is less formal.
- For example, a public limited company must have a minimum amount of £50,000 of share capital, while there is no minimum for a private limited company.
- Private limited companies can have just one shareholder who is also the director; there’s no maximum number of shareholders but as a private limited company, shares can’t be traded publicly on the stock market
- A public limited company must file accounts within six months of the accounting year (nine months for private).
- Other necessities for a Public Limited Company include AGMs, the acquisition of a trading certificate before trading and the need to have a legally qualified secretary.
Legal requirements for limited companies
Limited companies must have at least one director to run the business. Company directors are legally required to:
- File an annual return with Companies House. This is a snapshot of the business including details of directors, the registered office, share capital and shareholdings to ensure Company House’s records are up to date.
- Submit your company’s annual accounts to Companies House.
- Submit an annual corporation tax return to HM Revenue and Customs (HMRC). Corporation tax is then calculated and must be paid within nine months of the company’s accounting year end.
- If your business turnover exceeds the VAT threshold, currently £85,000 (April 2017) then your company must be registered for VAT and quarterly VAT returns completed online.
- All employees of the company including directors must pay income tax and Class 1 National Insurance Contributions. If you operate the company payroll yourself, you must report employees’ payments and deductions to HMRC on or before each payday and then pay what you owe to HMRC monthly – although small employers may be able to pay quarterly.
How do I set up a limited company?
There are several steps involved in forming a limited company, including deciding whether to register the business yourself or use a specialist formation company; deciding on the company officers; choosing a company name and filing registration documents with Companies House.
1. Choose a business name
Before you can register your new business as a limited company, you’ll need to decide on a name for it.
The new company cannot have the same name as another registered company, or even one that’s too similar. Perform a Google search on the business names you’re considering and search the Companies House register for a list of companies with similar names. You can also search the Intellectual Property Office (IPO) to check if a name is registered as a UK trademark.
There are some rules that restrict the types of name you can use for your business. The registered name cannot contain potentially misleading words such as Chartered, Bank, Royal, British, English, Scottish, Commission or words that imply professional qualifications that you don’t hold. Check the government guide to the rules on choosing a company name.
Whichever name you choose it must end in either Ltd or Limited. You can use a different business name to the registered company name as long as it is not the same as an existing trademark or contains a sensitive word.
2. Choose company officers
All limited companies must have at least one company officer who is responsible for the business at all times. Private limited companies need to have at least one company director too – usually the person starting and running the limited company – while public limited companies that have publicly traded shares need at least two directors and a company secretary.
- Company directors manage the company in accordance with its articles of association and the law. A company director is responsible for ensuring annual accounts and annual returns, as well as all notices of change such as the registered office address, are received by Companies House. You cannot be a company director if you’re an undischarged bankrupt or have been disqualified by a court from holding a directorship, or are aged under 16.
- Company secretaries, usually in place in larger companies, are responsible for maintaining statutory registers, keeping minutes of board meetings, and ensuring all statutory filings are completed. They’re typically professionally qualified accountants, barristers, solicitors or advocates.
3. Choose how to register a limited company
It’s relatively straightforward to register a limited company with Companies House yourself – you’ll need to complete a series of documents. Alternatively, you can pay an agent to register your business for you which is usually easier, quicker and with less chance of a mistake being made.
Register a limited company yourself
- Register your company with Companies House. It takes 24 hours to register and costs £12 to submit your registration online.
- You’ll need to have chosen a company name and have a UK address as its registered office. This address will be made public and is used by Companies House and HMRC to send official notices to the company. It should also appear on all company documentation such as invoices.
- You’ll need to submit Memorandum of Association documents online including the names of the company officers, directors and people with significant control over the company; the amount of share capital and how this is divided between shareholders; and the trading activities of the company, often referred to as the SIC Code. You can find the appropriate SIC Code from Companies House.
- Download templates for these documents from the Companies House starting a company section.
Using a company formation agent
- There are lots of company formation agents to choose from or you can use a solicitor to register your business. These options cost more but they are often quicker and a specialist will be able to guide you through the information needed for registering the limited company.
- You can search for company formation agents using the Companies House Company Formation Agents directory which lists the web address and phone numbers of recognised formation agents.
- Use Google to search for the agent online, including reviews from previous customers, before picking the one you’ll use.
- The company formation agent will handle all the paperwork and submit the documents to Companies House and it can take as little as three hours.
- The agent will be able to offer other services including the use of a registered office, scanning services for mail received and online portals for managing the administration of your business details.
What documents are needed to form a limited company?
Whether you decide to register the limited company yourself or use a company formation agent, registration documents for your limited company will need to be submitted to Companies House before you can start trading.
- A Memorandum of Association is a legal statement signed by all parties forming the company including the names and addresses of directors and shareholders.
- The Articles of Association is a legal document that states shareholders rights and the powers of company directors over the business.
- Form IN01 is a document listing the details of the company directors, company secretary if applicable, shareholders and details of the shares issued and the share capital. Download IN01 from Companies House.
How to choose a registered office address
During the registration process you’ll need to include the registered office address and directors’ service address. Official documents or legal notices are sent to these addresses and they are made public on the Companies House register.
A registered office address must be based in the UK and can be a residential address, although it does not need to be the trading address of the company. Many limited companies use a registered office address service that costs around £50 per year.
What should I do after registering a limited company?
Once your company is registered you’ll be sent a Certificate of Incorporation confirming the company’s existence and showing the company number and date of formation. You must now register your limited company with HM Revenue & Customs (HMRC) within three months of starting trading or risk a penalty.