How To Setup A Limited Company

For many of the sole traders we work with, they’re keen to know when and how to set up a limited company. Likewise, many new business people we work with want to launch as a limited company straight away.

There are a record number of self-employed people in Britain and that’s led to the formation of a record number of limited companies. But what is a limited company and why, for many entrepreneurs, is this the business structure they want?

In this article, we consider:

• What a limited company is;
• The advantages and disadvantages of running a registered limited company;
• What legal requirements are there when running a registered limited company?;
• How to set up and register your company;
• Frequently-asked questions about limited companies; and
• Your Black and White checklist for registering a limited company.

What is a limited company?

A limited company is a type of business structure which has a separate legal identity for its shareholders and directors. This makes it different to a sole trader business structure where the owner and the business have the same legal identity.

What’s the difference between a private limited company and a public limited company?

There are two types of limited company – “private” and “public”. Most limited companies are private limited companies which only require one shareholder and a minimal amount of share capital.

With a public limited company, a minimum of £50,000 share capital is required, it must file its accounts six months after year end (as opposed to nine for a private limited company), it must hold annual general meetings, and, subject to the acquisition of a trading certificate, its shares may be publicly traded on the stock market.

What are the advantages and disadvantages of running a limited company?

As a separate legal entity, a limited company can enter into agreements, take out finance, employ members of staff, purchase or hire assets and property and more.

In theory, this means that, unlike with sole trader where s/he is personally responsible for all of the debts accrued and unpaid by a business, there is no personal liability on directors and shareholders when a limited company ceases trading or enters bankruptcy.

In most cases though, smaller or newer limited company directors are required to sign directors’ guarantees on the debt their business takes on. If the company fails, the likelihood is that the lender will pursue them in a personal capacity for outstanding debt.

Some supplier or customers may also prefer you to be a limited company as they will perceive you to potentially be bigger than you actually are (reputational impact).

Limited companies are generally far more tax efficient. The amount you and your company pays in corporation tax and personal tax is normally lower than the income tax and National Insurance sole traders pay on their profit.

What legal requirements are there on limited companies and their directors?

All limited companies require at least one director to run the business. The directors of a company are legally required to:

• Submit their annual accounts online to Companies House;
• Submit an online corporation tax (CT600) return to Her Majesty’s Revenue and Customs (‘HMRC’) within nine months of their year end;
• File a confirmation statement with Companies House once a year which includes a summary of shareholders and the share capital they hold, the company’s registered office address, and details of the directors;
• Pay all employees (including directors) via a payroll system making payments of income tax and NI Class 1 contributions including withholding employees’ tax deductions until the 22nd of the following month before transferring them and NI Employers’ Contributions payments to HMRC;
• Set up and run a workplace pension system;
• Register for VAT and any other taxes online for which the company has a liability; and
• Trade solvently – ensuring that your limited company is able to meet its financial liabilities. If you believe the limited company has insufficient cash to continue trading, you must act to maximise your creditors’ interests at which point you should call in an insolvency practitioner.

Seven steps to setting up and registering your company

To form a limited company, you need to take the following seven steps:

Step 1 – choose your directors and shareholders

First, you need to decide who’s going to own the company and who’s going to run it? In most cases, there will be significant or complete overlap between shareholders and directors.

There must be at least one shareholder and at least one company director – they can be the same person. In many companies, there are multiple shareholders each holding a different size of ownership of the companies.

What is share capital?

Share capital is the money invested into a company by its shareholders in exchange for ownership of shares when setting up a limited company. Shareholdings may change later on with the introduction of further capital from existing or new shareholders or investors.

Who are the people with significant control over the business?

A person with significant control (‘PSC’) of a limited company is someone who:

• holds more than 25% of the voting rights and/or shares within a company and
• can appoint or remove members of the board.

You need to inform Companies House when setting up a limited company who the PSCs are and update it whenever this changes.

Step 2 – choose your company name

With over 1,500 companies registered in England every day, your first choice of company name might not be available so you should decide quickly in case someone else has the same idea. One thing you should make sure of is that, when you choose your business name, you make sure the online domain name is available for it before you begin trading.

You can check whether your desired company name is available by clicking here with this online form from Companies House – you’ll hear back straight away. You can also check whether the .co.uk domain name is available for your business by clicking here.

Step 3 – choose a registered office

Next, you need to choose a registered office – this is the address to which all official documentation will be sent. It doesn’t need to be your trading address – it can be your Solicitor’s or Accountant’s address, for example, but you do need to make sure that whichever registered office address you choose which you don’t control forwards all postal mail onto you without delay.

Step 4 – create your formation documents for Companies House

When you form your company, you’ll need to provide Companies House with your Memorandum of Association and your Articles of Association. Template documents are available online but you may wish to consult with an Accountant or Solicitor to have bespoke documents drawn up for you depending on the complexity of your business structure and the number of shareholders.

Step 5 – register your limited company direct, through a company formation agent, or through your Accountant

You’re now ready to register your company. You’ll need to submit the trading activity of the company using the Companies House SIC code system. This may be difficult for newer internet-based companies because the SIC code system is only updated infrequently – click here to see the current list.

You’ll also need to notify Companies House of the amount of share capital and how this is divided among the shareholders of the business, the names of directors and PSCs within the business, and the names of the business officers.

You’ll be sent a Certificate of Incorporation for your records within a week by Companies House (if you request this) which contains the company number and the date of formation,

Step 6 – set up a business bank account

You should set up a business bank account without delay – please never use a personal bank account instead of a business bank account.

It’s from your business bank account that direct debits to collect corporation tax, VAT, payroll taxes, and more will be set up. It is also much easier for your Accountant to keep your financial records up-to-date and accurate by having a clear demarcation between personal and business spending.

During the coronavirus, this is probably the most difficult of the seven steps.

Step 7 – notify HMRC

Within three months, you need to register your Limited Company with HM Revenue and Customs. HMRC will need you to register for Corporation Tax and to acquire a 10-digit Unique Taxpayer Reference (‘UTR’) for the business. This will be sent to the registered office of the company. and is needed to liaise with HMRC and submit the corporation tax return to them. For more help and guidance on tax returns contact us today.

How to set up a limited company FAQs

Can I set up a limited company on my own?

Yes. If you decide that you want to form a limited company as its only shareholder and directors, you can do so.

How much does it cost to set up a limited company?

You can set up a limited company for £12 direct with Companies House – formation normally takes place with 24 hours of payment by credit or debit card. When registering, you must provide the details of three pieces of information about yourself and all other guarantors or shareholders within the business including passport number code, National Insurance number, telephone number (including area code), father’s first name, mother’s maiden name, and the town or city of your birth. If you form it through a formation agent or an Accountant or Solicitor, typically it will cost more, but it will be easier to do so.

How much do company formation services cost?

Your Accountant or Solicitor can register your limited company with Companies House – you could alternatively choose a formation agent to do it for you. These services will cost extra however third parties normally bundle in additional services as part of value-added packages. These packages will often include the opening a business bank account, registered office address service, filing of your first annual statement, VAT and tax registration, and they may register a domain containing your company name.

What are Articles of Association?

Articles of Association are a contract between a company and its shareholders which govern, among other things, how shareholder decisions must be made, board meetings and the procedures used during them, the circumstances under which forced share sales can be allowed, how new shares must be issued, and how company directors are appointed.

Articles can be changed or updated following a general meeting at which 75% or more the voting shares back the proposed alterations.

What is a Memorandum of Association?

A Memorandum of Association is a legal document created when a company is formed and registered to codify its relationship with its shareholders and to set out the main business of the company (the activities in which the company is permitted to participate).

What is the difference between directors and shareholders?

Shareholders’ behaviour is governed by the Articles of Associations whereas directors’ behaviour is covered by their own directors’ duties and service agreements.

Which is the better structure for me – a limited company or sole trader?

For micro-businesses, sole trader is normally the better choice. Setting up as a sole trader is easy and sole traders and their Accountants have far less paperwork to do than limited companies.

However, past a certain point, it’s far more tax efficient to be a limited company. How is it much more tax efficient? Here’s an example – a company director can pay him or herself with a mixture of salary and dividends – a sole trader will pay 20% income tax and 9% NI on income between £12,500 and £50,000 whereas a director may only pay 7.5% on income between £14,500 and £50,000.

The gap is narrowing though and the government has stated its intention to narrow the gap further through changing the tax code and increasing corporation tax.

However, tax is not the only factor to consider when you decide your business structure. Limited companies are also very good as they provide protection on your personal assets (limitation of liability) and can make your business appear bigger than you actually are to help you secure bigger contracts as a result (reputation impact).

What does a company secretary do?

A company secretary is the official within a company responsible for ensuring that the company complies with the Companies Act (2006).

What is a service address?

A service address is a postal address for a director, shareholder, guarantor, secretary, or a PSC within your limited company to which official correspondence can be sent from the government, the courts, HMRC, or Companies House. Many directors still list their residential address when setting up a limited company although many more, for reasons of privacy, will use a “care of” arrangement using their Accountants’ or Solicitor’s addresses.

Setting up a limited company – your Black and White checklist

Let Black and White Accounting help you (and your fellow shareholders and directors) in setting up a limited company, please contact us. We’ll guide you through the entire process and then we’ll make sure that all your financial, administrative, and secretarial records are kept up to date as you begin trading.

Let us know at which point in this checklist you need us to start providing our services:

• Business plan creation – advice and support on creating a stress-tested business plan and set of financial forecasts so that, prior to launch, you know your business’s strengths and weaknesses
• Fund raising – with the comprehensive details in your business plan and set of financial forecasts, we can guide you towards sources of funding if required whether that’s bank funding or private investor funding
• Company formation stage – we have worked with hundreds of clients over the past 10 years providing advice and guidance on shareholder structure, Memorandums of Association, Articles of Association, and more.
• Post-launch – you have established your limited company and you want a team of experienced and business-minded Accountants to keep your financial records up to date for Companies House and to provide you with the details and advice you need to make better decisions as you guide your business from this stage of its growth and development to the next.

Speak with Black And White Accounting

If you want us to assist you setting up a limited company or if you’ve already launched your limited company and you want us to provide you with bookkeeping and accounting services going forward, please get in touch with us today by contacting Black and White Chartered Certified Accountants, filling in the “Got a Question” form on the right, or calling us on 0800 140 464.

Many of our clients use us to setup their limited company, use our offices as their registered addresses and to help with the accounting and tax affairs going forward. We can also help with opening business bank accounts, especially in the current coronavirus crisis where this is the most difficult step in setting up your business.

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