Setting up a Limited Company

Section A: Understanding limited companies

 

There are two main types: companies limited by shares and companies limited by guarantee.

 

1. Limited by Shares

 

Typically for-profit businesses: These companies aim to generate profits for their shareholders.

 

Legally separate: The company is legally distinct from the individuals who run it, meaning it has its own legal rights and obligations.

 

Own finances: The company’s financial matters are separate from the personal finances of its owners and managers.

 

Shares and shareholders: Ownership is based on the distribution of shares, and shareholders are only liable for company debts up to the amount they invested or guaranteed to the company.

 

Profit retention: After paying taxes, the company can keep any profits it generates.

 

2. Limited by Guarantee

 

Usually not-for-profit: These companies don’t distribute their profits but instead reinvest them back into the company to further its goals.

 

Legally separate and financially independent: Similar to companies limited by shares, they are distinct legal entities with separate finances from those who run them.

 

Guarantors and guaranteed amount: Instead of shareholders, there are guarantors who agree to contribute a specified amount of money towards the company’s debts.

 

3. Characteristics

 

Legal entity: A limited company is its own legal person, able to own property, incur debts, sue, and be sued.

 

Limited liability: Shareholders or guarantors’ financial liability is limited to their investment or the amount they’ve guaranteed to contribute in case the company incurs debt. This does not extend to personal assets in most situations.

 

Continuity: The company can continue to operate beyond the lives of its shareholders or managers, ensuring stability for employees and operations.

 

Financial advantages: Potential tax benefits, the ability to raise funds through shares (limited by shares), and easier access to loans due to the company’s distinct legal status.

 

Public information: Registration requires disclosure of certain information, making it publicly available. This includes financial reports and details about directors which must be updated annually.

 

Section B: Planning & preparation

 

A limited company can be formed by any one, or more, persons (the legal meaning of person in this instance can refer to individuals, companies or any other organisation) wishing to operate the business for lawful purpose, who add their names to the company memorandum of association. This confirms their agreement to the formation of the limited company.

 

1. Legal Requirements

 

There are a number of legal requirements to adhere to when setting up a limited company. These are:

 

a. Company Name

Choose a name for your company, bearing in mind the following considerations:

Your company name must be unique. It can’t be the same as the name of an existing limited company. If Companies House deems the names to be too alike, your name will be rejected. Check the Companies House register to find out whether your company name is already taken by visiting:

https://beta.companieshouse.gov.uk

The company name must end in ‘Limited’ or ‘Ltd’ (or the Welsh ‘Cyfyngedig’ or ‘Cyf’ if you register in Wales).

The use of ‘same as’ names, where the only difference between your company name and the name of another company are punctuation, special characters, a character or word that are similar in meaning or appearance, or a commonly used character or word, are not allowed. The only exceptions to this are if your company is part of the same group as the existing company with the same name, or they have agreed in writing to allow you to use that name.

The use of offensive or sensitive words or expressions is not allowed.

You can’t use a name that suggests a connection with any government authorities unless they have granted you prior permission.

It may be wise to choose a name which has an available web domain.

Is your company name easy to understand and remember?

Don’t choose a name that is too restrictive. Bear in mind that as your company grows and develops, it may change what it does or aspects of that.

 

b. Company Address

 

According to Section 86 of the Companies Act,

“A company must at all times have a registered office to which all communications and notices may be addressed”.

Your company address must be registered with Company House as your ‘UK registered office address’. Even in the situation where your company sells products online or carries out business outside the UK, you must have a registered office address in the UK.

The company address will be available for everyone to view on the public register.

The address used must be in the same country that your company is registered in. A company registered in England, for instance, must have a registered address in England.
This address will appear on all your business communications – letters, emails, stationery, marketing material, invoices and company website.

 

c. Directors and Company Secretary

 

You must have at least one director when you form a limited company. Each director must be at least 16 years old, and not disqualified from taking the role of director. They don’t have to live in the UK as long as the registered office address is in the UK.

Each director has responsibilities for the running of the company, that include, but are not limited to:

 

following the rules contained in the company articles of association

 

making decisions for the good of the company

 

ensuring that company accounts and reports are correctly prepared and annually sent to Companies House and the HMRC

 

keeping company records and reporting changes to Companies House and the HMRC

 

registering for self-assessment and forwarding an annual personal tax return to the HMRC

 

Appointing a company secretary is optional but creating such a role within your company can be useful to take on a portion of the responsibilities of the directors. However, they do not bear any legal responsibility. That lies with the directors themselves.

 

The company secretary may also be a director but must not be an undischarged bankrupt or the company’s auditor.

 

d. Shares and Shareholders

 

Most limited companies are limited by shares. This means that they are owned by their shareholders, who have a number of rights over the company.

There must be at least one shareholder, possibly a director, but there is no limit to the maximum number of shareholders a company may have.

You can set any price you like for each share, but it may be wise to limit the shareholders’ liability in the case of the company’s closure by keeping the share value low.

There are different classes of shares (such as ordinary shares or non-voting shares) which come with different rights. You should decide whether you will use different classes of shares and what rules and rights will apply to each class.

 

e. Memorandum and articles of association

 

These documents form the constitution of your company and must be forwarded to Companies House when you register your company.

All initial shareholders sign the memorandum of association, a legally binding document, to confirm their agreement to the forming of the company. You can find a template for the memorandum of association on the Companies House website.

The articles of association list the rules of the company and how the business will be operated by the directors on the shareholders’ behalf.

The articles of association must include:

• The powers and responsibilities of the directors
• The liability of any member
• Director meetings, delegation, voting, and conflicts of interest
• Company records, including records of director decisions, and the manner in which these records will be retained
• Appointment and removal of directors
• Information on shares and dividends
• General meetings – minutes and attendance
• Communication
• Use of the company seal (if one exists)
• Directors’ insurance and indemnity

 

Section B: Register your company with Companies House

 

Once you have all of the above information, you can then register your limited company with Companies House.

Companies House is the government body that administers companies within England, Scotland, Wales and Northern Ireland, and the UK registrar of companies.

You can register online, by post, through an agent, or by using third-party software. The fees vary depending on which method you use. Currently the online application costs £12 and a postal application costs £40.

Once your company is successfully registered, you’ll receive a certificate of incorporation. This displays the company number and date of formation and confirms that your company legally exists.

 

Section C: Register for corporation tax with HMRC

 

You must register your company for corporation tax within 3 months of when your company begins trading. In this instance, trading would mean any of the following:

• buying and selling
• advertising and marketing
• renting or buying a property
• employing anyone

Late registration will most likely result in a penalty.

Once you have registered with the HMRC, they will inform you of your deadline to pay corporation tax.

 

Section D: Additional guidance

 

1. An accountant

 

Although it isn’t a legal necessity to use an accountant for your limited company, the services of an accountant can prove extremely helpful in understanding all the financial implications of running a company. Their advice and services can cover:

• VAT registration
• Ongoing tax and dividend advice
• Annual accounts
• Annual corporation tax returns
• Company payroll
• Book keeping
• Dealing with correspondence from Companies House and the HMRC
• Tax planning advice

They can be especially useful as your company grows.

 

2. Company bank account

 

Your company has its own separate identity to its directors. It therefore legally requires a bank account of its own to keep the company finances separate to that of the directors. This bank account must be in place before your company can begin doing business.

Although there is no legal requirement that you use a business bank account (instead of a normal bank account) for your company, a business bank account may well offer extra services such as a business credit card.

You will usually pay a fee, or a higher fee, for a business bank account over a normal account.

Do your research on the business bank accounts that are available to find out which would suit your company best.

 

3. Register for VAT with HMRC

 

The current threshold for registering for VAT is £85,000 in taxable annual turnover.

If your company turnover is below this, then there is no legal requirement to register for VAT, but you still may voluntarily register your company if you like.

If the company turnover is over that £85,000 threshold, then you must register for VAT.

You can find out more information on VAT registration by visiting https://www.gov.uk/vat-registration

 

4. PSC Register

 

Since 2016, there has been a legal requirement for a company to keep a legal record of and report its ‘beneficial ownership’, that is, the people who control and/or own the company.

 

Why legal advice is important

 

The process of setting up a limited company, as you can see, is extensive.

A specialist legal adviser will be able to advise you on the basic procedure of setting up a limited company and also be fully aware of what to do should any complications occur.

Their in-depth understanding of the procedures and requirements involved will smooth the process along and reassure you that your limited company has been set up correctly.