Our blog post on Trivial benefits sparked some interest and questions as to how to set up a limited company.
Are you thinking of forming a limited company but feel slightly overwhelmed? Worry no more, we have got you covered in this blog post.
Is a limited company right for your business?
I believe the first thing to consider is if a limited company is right for your business.
Choosing the right business structure is important and setting up a limited company is just one of the many options available.
Setting up a limited company means that you are creating a separate legal entity from yourself even if you founded the company. All profits (money left after all business-related expenses including tax have been paid) belong to the company. This means you cannot spend company funds as you please, you can only withdraw money from the company in form of salary payments and dividends.
If however you choose to set up (or remain) as a sole trader, you get to keep all profits after tax. The formation process for setting up as a sole trader is much simpler than it is for limited companies. Worthy of note is that as a sole trader, you pay more tax when your net profit reaches a certain amount, and you are also financially liable for anything that goes wrong in and with the business.
Private or Public Company?
If you decide that a limited company is the best option for your business, you need to decide the type of company you would like to set up, there are options available, two of which are:
Public Limited Company (PLC)
Private Limited Company (LTD)
A PLC must have an issued share capital of at least £50,000 (of which at least 25% of the nominal value and the whole of any share premium must be paid up when the company is registered) with at least two shareholders, two directors and a company secretary. In most cases, the accounts of a PLC must be audited. Worthy of note is that many PLCs are not registered from scratch but are converted from existing LTDs.
Safe to say that an LTD is more suitable for small businesses, startups, freelancers, and contractors.
Choosing a Name for Your Company
Now you have decided to set up an LTD, you need to register with Companies House.
A few things to check before you get started:
Is your preferred company name available – you check this with Companies House Name Availability Checker.
Your company name does not contain any of the sensitive works or expressions contained in Government guidance documents.
Keep your company name consistent in both your application and supporting documentation.
Do you plan on registering your company name as a trademark to prevent others from trading under your company name?
Registering Your Limited Company
You need to register your company with Companies House.
This involves registering an official for your company, and a classification of economic activities (SIC) Code. This code identifies what your company does. You can check what the right SIC CODE is for your company on the Companies House Website.
You can choose to register for Corporation Tax at the same time you are registering your company. I advise this if you intend to commence trading with your company soon after creating it. If you chose to register for Corporation Tax later, this is done a separate way and must be registered within three months of when you start trading with your new company.
Appointing a Director
A limited company must have at least one director. As the founder/owner of the company, it is likely that you will be either the only director, or one of the directors.
As a company director, you are legally responsible for company records and the company’s performance and accounts.
The company director(s) name and some other personal information will be publicly available from Companies House. If you prefer not to have your home address made public, you can ask for it not to be included on the register.
Shareholder/Guarantor.
An LTD must have at least one shareholder or guarantor. This can also be a director.
Limited companies are limited by shares this means that they are owned by shareholders who have certain rights.
Who is a shareholder? A shareholder is an individual who has invested money into the company and in turn receives a percentage of ownership in the form of shares.
When a company is limited by guarantee, it must have guarantors and a guaranteed amount (instead of shareholders and shares).
A company limited by guarantee is favoured by not-for-profits as this provides personal financial protection. Profit isn’t usually distributed to guarantors, instead, the profit is reinvested into the company to help it achieve its non-profit aims.
Required Documentation
You require both an Articles of Association, and a Memorandum of Association for companies formed in the UK under the Companies Act 2006.
The Articles of Association isa governing constitutional document that contains information about how the company should be run. This information must be agreed by the shareholders or guarantors, directors, and the company secretary.
There are two options for creating articles of association, either adopt default standard articles (‘model articles’ – this is recommended by the Companies Act 2006) or write yours and upload (or send) when you register your company.
A Memorandum of Association is a legal statement signed by all initial shareholders or guarantors who agree to form the company. If you register your limited company online, a memorandum of association will be created automatically, if you register by post you will need to use the government’s Memorandum of Association template to create one.
Record Keeping
In addition to keeping records about the company, you must also keep financial and accounting records.
It is advisable to hire an accountant to help you oversee the financial information and help you with your compulsory compliance filing with both Companies House and HMRC.
You need to keep records of the following:
Directors, shareholders, and company secretaries.
Outcome of shareholder votes and resolutions
Debts agreements for the company who they must be paid back to and when (specific dates).
Company compensation policy (payments if something goes wrong and the company is to blame).
Transactions in which someone buys shares in the company.
Loans or mortgages secured against the company’s assets.
In addition to the above, you are also required to keep a register of Persons with Significant Control (PSC), the PSC register should include details of any individual who:
Has more than 25% shares or voting rights in the company.
Can influence or control the company.
Can appoint or remove most directors.
You require a PSC register even if you have no one in your company with significant control.
You will also need to keep records:
Monies received and paid out by the company.
Details of company-owned assets.
For companies that hold stock, details of the stock that the company owns at the end of the financial year, stocktaking records you used to work out the stock figure.
Receipts, invoices, and bank statements.
If you keep your records somewhere other than your company’s registered address, you must let Companies House know.
You can be fined by HMRC (£3,000) or even disqualified as a company director if you do not keep accounting records.
Financial record keeping can feel overwhelming, I always advise startups to consider using accounting software in addition to hiring an accountant.
Business Bank Account
Because a limited company is a separate legal entity from its shareholders and directors, it’s finance must be kept separate from personal finances.
There is currently no legal requirement to open a business account for your limited company. But it is much easier to manage your business finances if you open one for your company.
Some of the advantages of forming a limited company are:
The company’s name is protected by law, until you close the company down, another company cannot use it.
Transferring ownership of a company is straightforward.
You will not be personally liable for financial losses.
You might pay less personal tax than you would as a sole trader.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide.
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