Flexible monthly business insurance
Whether you’ve got dreams to start a business and make it big, or you’re a sole trader and want to switch structures, setting up a limited company follows a standard process that anyone can do.
With over 4 million limited companies in the UK, it's certainly a popular choice for many. But is it the right choice for you and, if so, how do you register as a limited company?
In this article, we'll take you through each step and explain some of the things you need to think about when setting up a limited company.
What is a limited company?
A limited company is really defined as a company or business that’s limited by shares or guarantee. And by ‘limited’ we mean limited liability. As long as you’re set up correctly, you won’t usually have any personal liability for financial losses made by the business.
Is starting a limited company the right option for you?
The first thing to establish is whether your individual circumstances suit starting a limited company or if another structure would be more suitable instead. Other structures include:
- Sole trader – you run the business yourself, are self-employed and fill out Self Assessment tax returns every year.
- Partnership – you nominate a partner (which could be a limited company) and you both personally share responsibility for the business.
- Social enterprise – a business that has social, charitable or community-based objectives. You can set this up in numerous ways, including a limited company, charity and sole trader.
- Overseas company – a business that operates outside of the UK, but has a place of business in the UK or carries out business in the UK.
- Unincorporated association – an organisation set up for a reason other than to make profit, such as a voluntary group. You do not need to register an unincorporated association and members are personally responsible for its debts.
It’s worth understanding how the different structures work, so that you can be confident your business is set up correctly. A company formation agent or accountant can help you decide which structure is the most appropriate.
Why have a limited company?
Before you think about starting a limited company, it’s worth considering the reasons why you want to create one.
One of the best ways to assess whether starting a limited company is right for you is thinking about the pros and cons.
Some of the benefits of a limited company include:
- No personal liability – a limited company is considered a separate legal entity from its owners. This means if the company ran up debts, you wouldn't be personally liable.
- Tax advantages – as the owner of a limited company, you can pay yourself a salary from the profits but also pay yourself in bonuses and dividends, which can be more tax efficient.
- Limited liability – as long as you haven’t committed fraud, you should not be personally liable for any losses that your business makes.
- Professional appearance – having a limited company can give a more professional appearance and some companies may even require you to have a limited company to work with them.
Some cons of starting a limited company include:
- Time consuming – setting up a limited company involves slightly more responsibilties, accounting duties and paperwork than being a sole trader. However, hiring an accountant or using accounting software should be able to minimise this.
- Cost – it costs nothing to set up a sole trader, but you'll need to pay £12 to set up your limited company online with Companies House or £40 by post. You may also think about appointing a company formation agent to help you as well as a hiring accountant or paying for accounting software to support with the additional accounting responsibilities, which will also cost you.
- Privacy – when you start a limited company, the information about its directors, earnings and business address (which could be your home address) is publicly available for anyone to view on Companies House.
Can you register a limited company on your own?
Yes, it's possible to set it up yourself, but there is quite a bit to prepare, which can be overwhelming if you're not familiar with the process. If you need additional support, you can hire a company formation agent or an accountant to help you.
A company formation agent can help you with:
- Deciding on a structure
- Naming your company
- Opening a business bank account
- Appointing a qualified company secretary
- Completing documents and liasing with Companies House and HMRC on your behalf
An accountant can help with the latter as well as advise you on your new tax responsibilities and register you for VAT, Corporation Tax, and payroll if you are an employer.
Your trade association, if one exists for your industry, can also help out.
If you'd like to use a formations agent, gov.uk provides a vetted list who’ve completed Companies House testing (or use products from those that have).
How to set up a limited company
Before you even register limited company, there are a few things you need to think about and prepare.
1. Decide on your structure
There are a few different types of limited companies available in the UK that you can choose from:
- Private limited company, limited by shares (LTD) - has shares and shareholders and can keep profits after paying tax.
- Private limited company, limited by guarantee (LGB) – has guarantors and a guaranteed amount and invests profits it makes back into the company.
- Public limited company (PLC) – has shares and shareholders who can be members of the public. Has more legal requirements and must have two directors, two shareholders, a company secretary and at least £50,000 of share capital.
- Limited liability partnership (LLP) – has partners who are liable for their share of the business and responsible for their share of the business.Partners can directly manage the business as opposed to shareholders voting to elect a board of directors who select individuals to run the business.
- Private unlimited company – doesn't have to submit an annual return or financial statements. Shareholders are responsible for the amount they invest and therefore liable if the company had debts.
Most sole traders, start-ups and small businesses will choose to be an LTD as there's no minimum share capital, so you can set one up with a single share worth as little as £1.
2. Choose a name
This might be as simple as it sounds, but tight rules cover the naming of limited companies, and you won’t be able to move forward without it being done correctly.
For instance, you can't have an identical name to another company or even have something too similar. Companies House also won't allow anything that's offensive.
When choosing, it's worth thinking about about what works with ‘Limited’ or ‘Ltd’ (or the Welsh equivalents) as well as if there is a domain name free if you want to start a website for your business.
To view the full details of gov.uk's rules, including where you need to display your full name, check out the full restrictions on naming your company and then see if your chosen name is available on the company name checker.
3. Appoint directors and a company secretary
Private companies must have at least one director who will be legally responsible for running the business. You can have more than one director and there's no limit to the number of directors you can have.
You don’t have to have a company secretary, but they can take on certain responsibilities on a director’s behalf.
There are a few differences between company directors and secretaries. Understanding them will help you decide who should be appointed each role. Here's what you need to know:
- Will have responsibility for running the company
- File an annual return and accounts to Companies House
- File an annual corporation tax return to HMRC
- Report employees' payments and deductions to HMRC
- Make decisions on behalf of the company and for the business's benefit
- Can hire other people to manage certain responsibilities, but will still have ultimate legal responsibility
- Are responsible for keeping accurate company accounts, records and reports
- File necessary tax returns each year
- Must be aged 16 or over and have a UK registered office address
- Make their name and personal information publicly available via Companies House
- Must provide a service or correspondence address, (this will also be publicly available, but if it’s a home address Companies House can remove it from the register)
A company secretary:
- Can be a director
- Can’t be the company’s auditor or an ‘undischarged bankrupt’ (unless they have court permission)
- Acts as the company’s chief administrative officer
- Are usually in place in larger companies, and typically are professionally qualified accountants, lawyers or similar
Again, private limited companies don’t have to appoint a secretary, but many do. They tend to be professionally qualified, and can support directors with much of the administrative work that comes with running a company.
4. Appoint the shareholders, guarantors or people with significant control
Depending on which structure you've chosen, you will need to decide on who your shareholders, guarantors and people with significant control are.
Most limited companies will be limited by shares, so we’ll start with shareholders.
If you’re limited by shares, you must have at least one shareholder (they can be a director, too). There is also no limit to the number of shareholders a company has.
A share can be priced at any value, and shareholders will need to pay their share(s) in full if the company folds. But you can give a share a very low value (for example, 50p) to limit the risks.
Remember, share capital is not linked to how much the company is worth.
Specific rules and requirements come with shares. If you’re not working with a formation agent, make sure you’re familiar with the following:
- Issuing initial shares (including your ‘statement of capital’) – this is the number of shares in the company and their total value. For instance, you could issue 100 £1 shares across two directors. So, you would each pay £50 and have equal shares in the company.
- Your ‘prescribed particulars’ – this is the rights a share gives the shareholder
- How dividends are taxed and dividend allowances
Some companies are limited by guarantors and guaranteed amounts, rather than shareholders and shares. Not-for-profits usually come into this category.
Guarantors are ‘company members’, and make important decisions for the company. They don’t usually take any profit, but promise a ‘guaranteed amount’ if the company falls into debt.
The guaranteed amount is not linked to how much the company is worth.
Person with significant control (PSC)
Another important group to consider are people who may have significant control over your company (PSC). Often, these are people who have a significant percentage of shares or voting rights. This could be shareholders, guarantors or in some situations a trust or separate firm.
You’ll need to identify and record your PSC to Companies House, then keep this information up-to-date. Some factors that will help you identify a PSC include:
- They hold more than 25% of shares
- They hold more than 25% of voting rights
- They can appoint and remove people on the board of directors
- Can influence or control your company or trust
5. Prepare your company documents
This will be the director’s responsibility, and a company secretary is usually tasked with bringing everything together. However, a company formations agent or accountant can help you out.
By documents, we mean the ones setting out how you’ll run your company. They’ll usually include your ‘memorandum of association’ and ‘articles of association’. You’ll need both when registering your company.
Memorandum of association
This is your legal statement, signed by all stakeholders or guarantors involved in forming the company. If you register your company online, it will be created automatically.
Remember, you can’t update the memorandum once the company has been registered.
Articles of association
These are written rules, agreeing how to run the company. They’ll be set out by your shareholders or guarantors; directors and the company secretary.
You can use standard articles (known as ‘model articles’, which are available from gov.uk) or write your own.
You can’t use model articles if you’re setting up a community interest company (CIC), so read up on these if you think this may apply to you.
6. Keep records
You've probably guessed by now that you'll end up with a lot of important documentation when starting a limited company.
Alongside crucial documents like those mentioned above, you will also have to keep financial and accounting records, file a company tax return and you may also be required to have a limited company business insurance policy.
Without up-to-date records of these documents, you could be fined thousands, so this is an important step. Here's a breakdown of each type of records you need.
Accounting and financial records include:
- Incomings and outgoings
- Any debts the company has or is owed
- What assets the company owns
- A breakdown of stock owned and stocktakings used to work out the stock figure
- Goods bought and sold
- Who you bought them from and sold them to (not applicable for retail businesses)
Company records usually include:
- Information about directors, shareholders and company secretaries
- The outcome of shareholder votes and resolutions
- Transactions detailing shares bought in the company
- Debentures (details of loans the company will repay by a specific date in future) and who they will be paid back to
- Indemnities (details of payments the company will make if something goes wrong as a result of something the company did)
- Loans or mortgages secured against the company's assets
Company tax returns include:
- All money the company has spent in the form of receipts, petty cash books, orders and delivery notes
- All the money the company has received in the form of invoices, contracts, sales books and till rolls
- Any other relevant financial documents such as bank statements and correspondence
You should aim to keep records for at least 6 years or longer, in some cases. This could include records of something the company has bought that's expected to last longer than six years, the transaction covers more than one accounting period or you sent your tax return in late.
Now it's time to register with Companies House.
This involves deciding on an official address – which could be yours and your directors home addresses or a service address if you want to keep this information private – and picking a Standard Industrial Classification code (SIC) code, which identifies what your company does to Companies House. Gov.uk has a condensed SIC list so you can check what your code is.
If you need to, you can register for Corporation Tax at the same time.
Ready? You can get started with registering your company on gov.uk.
You may also like:
We've made buying insurance simple. Get started.
- 21 September 20224 minute read
You don’t have to be an accountant to understand your financial performance. Use our calculator to assess your business with five important accounting formulas.
- 15 September 20223 minute read
If an employee falls ill, they could be eligible for Statutory Sick Pay. But what’s the current SSP rate? And as an employer, what should you know about SSP?