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Setting up a limited company

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 as a limited company.

New businesses typically fall into one of three types: sole trader opens in new window, partnership opens in new window 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 generally the best option.


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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, a limited company 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, then (unless there has been some material  impropriety on your part, e.g. fraud, and save to the extent you have agreed to personally guarantee the liabilities of the business, e.g. to a landlord) 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 with less risk to personal wealth or assets.

Ownership of a limited company is divided up into shares which are then allocated to each shareholder.

Shares can be separated into different classes with different rights (e.g. some voting or non-voting) and can be held by shareholders in any proportions.

Therefore the company can be owned in any way you like.

Advantages of forming a limited company include:

  • Liabilities such as debts or legal action opens in new window are limited to the company. You are generally protected from going personally bankrupt in the event the business fails – as stated, this is save where there has been some wrongdoing on your part.
  • If you plan to employ staff opens in new window, it’s better to form a limited company and pay salaries via the Pay As You Earn PAYE scheme opens in new window
  • Corporation tax opens in new windowon profits is currently 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 issue shares in the business to raise capital.
  • A limited company is generally 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 limited companies (i.e “XYZ Limited”) and public limited companies (i.e “XYZ plc”) 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 opens in new window 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 suitably qualified secretary.

Limited companies must have at least one director to run the business.

Company directors are legally required to:

  • File an annual confirmation statement with Companies House. This is a snapshot of the business either confirming any changes in the details of directors, the registered office, the share capital and shareholdings, or that there have been no changes, to ensure Companies House’s records are up to date.
  • Submit your company’s annual accounts to Companies House.
  • Submit an annual corporation tax return opens in new window 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 £90,000, then your company must be registered for VAT opens in new window and quarterly VAT returns completed online. If turnover is less than the threshold you can still register voluntarily, and there can be pros and cons of voluntary registration – if in doubt you should seek specialist advice.
  • 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 as a limited company, you’ll need to decide on a name for it opens in new window

The new company cannot have the same name as another registered company in the UK.

Even if not the same, if your proposed name is too similar, then you may end up in a dispute as to having the right to use it, especially if the existing company is in a similar sector to you and/or it has registered the name as a UK trademark.

Search the Companies House register opens in new window for any company with the same name, it’s also worth doing a Google search for names similar to the one you’re considering.

You can also search the Intellectual Property Office opens in new window to check if a name is registered as a UK trademark opens in new window.

You should also consider ensuring that any web domain you would like to use is available and, if so, securing it before registering as a limited company.

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. opens in new window

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 director 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 (for private companies having a company secretary is optional).

  • Company directors manage the company in accordance with the law and with its articles of association (i.e the company’s rule book). A company director is responsible for ensuring annual accounts and confirmation statements are received by Companies House within the required time period, as well as all notices of any change in the registered information such as the registered office address. 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 a registered office and director service address

As well as the company name and directors and shareholders, you’ll need to have chosen an address as the company’s registered office.

This will need to be a physical address (i.e. not a PO Box) and it needs to be in the relevant part of the UK – i.e. an English company will need to have a registered office in England; a Scottish company one in Scotland.

This address will be made public and is used by, among others, Companies House and HMRC to send official documents or legal notices to the company.

It should also appear on all company documentation such as invoices.

As a public record, any other party wishing to write to the company will be able to use that address for formal correspondence.

Therefore, while it does not need to be the trading address of the company, it should be somewhere where post is checked regularly.

Limited companies can use a registered office address service offered by agents.

When the company is incorporated, and also whenever further directors are appointed, each director has to state their residential address (though this will NOT be made public).

However, they will also have to give a service address which WILL be made public – this could be their residential address (if happy for it to be public) or it could be the company’s registered office or any other address.

As with the registered office, it should be a physical address and, as it will also be used for formal correspondence, it should be an address where post is checked regularly.

It does not need to be in the relevant part of the UK, or even in the UK itself.


4. 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

It costs £12 to submit your application to register a company online and, subject to your application being in order, the new company is usually incorporated within 24 hours.  Submitting your application by post costs £40 and it will take longer (usually a week or so) before the company is incorporated.


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 opens in new window. These options cost more but they will be able to guide you through the information needed for registering a limited company.
  • You can search for company formation agents using the Companies House Company Formation Agents directory opens in new window 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 a few 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 as a 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. These are:

  • a Memorandum of Association – a short statement, signed (electronically if necessary) by each proposed shareholder, confirming they wish to form the company
  • Articles of Association – the constitution of the company that states among other things shareholders’ rights and the powers of company directors over the business; there is a default template if you do not wish to prepare your own
  • Form IN01 – the document that sets out all the requisite details of the company, namely the company name, the trading activities of the company, often referred to as the SIC Code (you can find the appropriate SIC Code from Companies House), registered office, details of the directors and (if desired) company secretary, the amount and details of the company’s share capital, (if relevant) how this breaks down into different classes of shares, and how this is divided between shareholders. You will also need to include details of those with significant control over the company and and (if you are proposing to use a company name with a sensitive word that is subject to restrictions, see above) relevant additional information to support your application to use that word.

What should I do after registering a limited company?

Once you have registered as a limited company 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 HMRC within three months of starting trading or risk a penalty – HMRC should contact you automatically at the company’s registered office asking you to do so.


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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or its subsidiaries or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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