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Looking to set up a limited company but don't know where to start? This step-by-step guide explains the process, from choosing a name to preparing your documents and registering your company.
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A limited company is a type of legal structure for your business. Limited companies:
Here we look at how to set up a limited company, along with a limited company’s benefits and costs.
There are a number of benefits of being a limited company over a sole trader:
But remember that being a sole trader means a simpler business structure, so it’s important to carefully consider the extra responsibilities involved with limited companies and whether it’s right for your business.
There’s a tangible monetary cost when setting up a limited company, but there are intangible ones too when comparing the structure with sole traders.
Read more about the difference between a sole trader and a limited company, or watch the video below.
It doesn’t take long to register your company with Companies House online. If you’ve got everything ready, you can do it in a matter of minutes and you’re usually registered within 24 hours. Postal applications take eight to 10 days.
But it may take you some time to fill in the paperwork needed beforehand. Having a business plan should help you organise your to-do list and work out how much time you need to get going.
Follow these steps (and questions to ask) when setting up a limited company.
You should work out whether you need to set up a limited company in the first place.
Being a sole trader is the most common legal structure for businesses in the UK. At the start of 2020, there were 3.5 million sole traders – 59 per cent of total businesses in the private sector.
It’s easy to set up as a sole trader and it comes with relatively few legal responsibilities, meaning it suits businesses that want to get started quickly.
But as we’ve already mentioned, sole traders have unlimited liability, which means they’re personally liable when something goes wrong. Being a sole trader can also be less tax-efficient.
Think about the type of business you’re setting up, and the risks involved. It’s usually a good idea to get professional advice if you’re not sure.
As two separate limited companies can’t have the same name, you’ll have to come up with an original name for your business.
Keep in mind that Companies House won’t allow anything offensive. They also have a list of sensitive words and phrases you can’t use.
And as the world moves online, it’s important to check whether the name is available to use as a URL (you can do this using a domain checker).
For some light-hearted inspiration on choosing a name, take a look at our business name generator.
Every limited company needs at least one director (someone responsible for running the company), but there’s no limit on the number of directors a company can appoint.
When setting up a limited company, the director must be 16 or over and their responsibilities will range from legal to financial. Gov.uk says that as a director you must:
Avoid these responsibilities and you could end up facing penalties and even prosecution, so make sure you’re prepared to meet them before you incorporate.
A good accountant can help on the tax front, while insurance can keep your limited company protected. Explore our limited company insurance options.
A limited company needs at least one shareholder. Shareholders can also be directors.
As a small business, this might mean you will be the only shareholder. And if your business only has one shareholder, that shareholder owns 100 per cent of the company.
That said, there’s no limit to the number of shareholders a limited company can have.
When you register your limited company, you need to give information about the shares and how they’ve been issued. You should state:
It’s common for new small limited companies to issue 100 £1 shares and pay £100 into the company bank account when incorporating.
You can divide this if you have more shareholders. For example, if you have two directors, you can issue 100 £1 shares, with both shareholders paying £50 into the company bank account.
This means the company is divided equally between the two shareholders, but you could also split it unevenly if you wanted to.
You need to identify the people with significant control (PSC) in your business and tell Companies House about them on your company’s PSC register.
Companies House says PSCs are likely to be people who have:
These are the documents that say how you’re going to run your limited company.
The memorandum of association is the legal document that all your initial shareholders sign, agreeing to form the company. It’s created automatically when registering your company online.
The articles of association are written rules about running the company, agreed on by the directors and shareholders. You can use model articles as a template, or create your own.
Download your free memorandum and articles of association templates.
There are two types of records you need to keep:
If you don’t keep accounting records, you could be fined £3,000 or disqualified as a company director, so it’s important to know your responsibilities.
Gov.uk says that company records include information about directors, shareholders and company secretaries, as well as:
Gov.uk says that financial and accounting records include information about all the money spent and received by the company, as well as:
You also need to file a company tax return, which involves calculations about your company’s finances (including turnover, profits and tax reliefs). You should keep accurate financial records to make filing your company tax return as easy as possible.
Generally, gov.uk says you should keep records for six years from the end of the last company financial year they relate to, but there are situations when you might need to keep them for longer. These include if you buy something that you expect to last for more than six years, or if you filed your company tax return late.
Read more about keeping accurate tax records.
You’re now ready to register your company with Companies House, choosing an official address and SIC code (the code that identifies what your company does – for example, 69102 is a solicitor).
You can register via the Companies House website for £12, or through a variety of incorporation websites. Some accountants will even cover the cost for you as part of limited company accounting packages.
When incorporating you’ll need to provide Companies House with the residential address of each director, or a 'service address' if you’re keen to keep your details off the public register. You’ll need to provide your registered company address and statement of capital, which is a description of the share structure of your new limited company.
Read more about registering with Companies House.
This article was updated on 18 November 2021.
Photograph 1: nakophotography / stock.adobe.com
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