Myths of forming a limited company in the UK

There are over 4 million limited companies in the UK registered with Companies House. Despite this huge number of registered UK companies, there are still many myths surrounding the forming of a private limited company.

These myths can mean that many small business owners that are looking to set up a business or incorporate from being a sole trader to a limited company are discouraged from doing so as they think the process of registering a company is too complicated or expensive.

In this blog, we will tackle these company formation myths and limited company untruths and give you the real facts about setting up a new company in the UK.

Company formation myths

There are many common myths about setting up and running a limited company in the UK. Here are a few:

Myth 1: It is complicated and expensive to set up a UK company

Reality

A common misconception is that company registration is complicated and expensive, but this really isn’t the case.

Company formation is relatively straightforward and affordable. It can be done online through Companies House for as little as £50 and the fee can be paid by debit or credit card. Your company is usually registered within 24 hours for online applications, but postal applications will take longer.

Many people decide to use a company formation agent, such as dns accountants to help them to form the company for them. Whilst you can set up a new company at Companies House yourself, there are several reasons why you should consider using a company formation agent to do this for you.

Company formation agents can save you time and money, offer different packages for different companies and give you valuable advice along the way. Read more about the reasons you should use a company formation agent here.

Whilst setting up a limited company is fairly simple, there are certain details that Companies House need, so you need to ensure you get it right.

All limited companies need to register with Companies House in the UK. The registration process is called incorporation. An individual can register their company online or via post.

We recommend you use a qualified accountant or company formation agent such as dns accountants to ensure the company is registered and set up correctly. With professional advice, the process with be fast and simple.

Find out more about dns accountants company formation packages here.

Here’s the steps you need to undertake when you register a company:

• 1. Choose which type of company you want to set up.
• 2. Pick your registered company’s name.
• 3. Check your company name is not already registered at Companies House.
• 4. Choose a company address (or opt to use a registered office - see details below).
• 5. Choose a SIC code for your company’s activity.
• 6. Choose directors and a company secretary.
• 7. Decide who the shareholders or guarantors are.
• 8. Identify people with significant control (PSC) over the company (this can be the same person that owns the company or a director or shareholder).
• 9. Prepare all the relevant documents including a memorandum of association, articles of association or bespoke articles of association.
• 10. Check what records you will need to keep and file. Things like annual accounts, confirmation statement, corporation tax returns etc.
• 11. Send all the relevant forms and documents to Companies House to register the company.

Myth 2: You must have a physical office/ business premises

Reality

It is a legal requirement that when you register a company you will need a registered office address, but it doesn’t have to be a physical office or business premises that you yourself own. Many people run businesses from their own homes in the UK.

Your registered office address can be your home address or you can opt to use a virtual service address (i.e. your accountant or solicitor).

The address you register must be:

• a physical address in the UK
• in the same country your company is registered in, for example a company registered in Scotland must have a registered office address in Scotland.

Your company’s registered office address will be publicly available on the online register.

If you do not want an address to be publicly available (for example, if it’s your home), you should not use it as your company’s registered office address. You must have the address in place before you register your company.

Myth 3: You will pay more tax when running a private limited company

Reality

A limited company route is more tax-efficient from a personal tax point of view than operating as a sole trader. As a limited company director, you will typically take a small salary (with little tax liability) and the remainder of your income in the form of dividends (which are free from National Insurance contributions). You will generally find dividend tax rates are lower than standard personal tax rates.

Your company will be required to pay corporation tax on your company’s profits. However, corporation tax rates for small companies are generally lower than most income tax rates. Note: corporation tax rates increased for some companies in 2023 and now vary depending on company profit. Read more about the April 2023 onwards corporation tax rates.

There are also advantages as limited companies can claim more as a tax deductible expense than sole traders can. Read more in our dns expense guide for limited companies.

Myth 4: You are legally required to have a business bank account

Reality

Having a separate company bank account is not a legal requirement under law, but banks typically require limited companies to use a dedicated business bank account. As a limited company is a separate legal entity, the money belongs to the business rather than you personally and it needs to be kept separate.

Myth 5: You’re personally liable for company debts

Reality

One huge benefit of forming your own limited company is your company offers separate limited liability protection. This means that if your company runs into financial problems, your personal assets will be secure. This is because a limited company is treated as a separate legal entity in its own right and therefore you don’t have personal liability for any company debts or legal challenges.

If your company becomes insolvent and is unable to pay its creditors, you will only be required to contribute the nominal value of your unpaid shares. Beyond that, your personal assets will be protected.

Sole traders, on the other hand, run a much higher risk as they have potentially unlimited personal liability. This means the individual is personally liable for any and all business debts, losses, and liabilities. This is why forming a limited company is far better to limit liability for individuals and separate out your company financial obligations from your personal finances.

Myth 6: You have to hire an accountant

Reality

There isn’t any legal requirement for limited companies to use an accountant, but it can be extremely beneficial and could save you and your business money.

Be aware that preparing your accounts in the right way can be time consuming if you are not up to date with latest legislation and have not done this before. Getting it wrong could mean you incur penalties.

Qualified accountants such as dns accountants are experts in accounts and tax legislation and are experts in business finance. They can not only fulfil your statutory obligations but also offer support and advice that may end up saving you money.

Find out if it is worth hiring an accountant here.

Myth 7: You can’t be a sole director or sole shareholder

Reality

A Limited Company can be set up with just one director, who can act as both the sole director and shareholder.

Most limited companies are limited by shares. This means they’re owned by shareholders, who have certain rights. For example, directors may need shareholders to vote and agree changes to the company.

A company limited by shares must have at least one shareholder, who can be a director. If you’re the only shareholder, you’ll own 100% of the company. There’s no maximum number of shareholders or directors.

Myth 8: You can’t change your company name

Reality

Private limited companies can change their name at any time by following the correct procedure with Companies House.

A company can change its name either by:

• a special resolution
• permission given in the company’s articles of association

Your new name must follow all the rules for company names.

Your company name will not officially change until Companies House registers the new name.

Myth 9: It’s harder to close a limited company

Reality

While closing a UK limited company involves some formalities, it’s a manageable process, especially with proper guidance and professional advice.

You need to have the agreement of your company’s directors and shareholders to close a limited company.

The way you close the company depends on whether it can pay its bills or not (whether it is solvent or insolvent).

There are various ways to close a limited company depending on the company circumstances. Some of the options are strike off, dissolution, voluntary liquidation or to allow the company to become dormant.

It is worth getting advice as to the most tax efficient way to close your company as it will depend on your individual circumstances. Find out more about how to close a limited company and extract profits here.

Myth 10: All personal and financial information will be made public

Reality

In return for the benefits of limited liability, your company must be open and transparent. Anybody who becomes a director or officer of a company must be prepared for some of their details to be publicly available. However, you can still protect your privacy.

Your full name, nationality, country of residence, and partial date of birth are made public, but your home address will only be made available if you use it as a registered office or service address.

Summary

Whilst there are certain rules and regulations that you need to adhere to when you register a company, but these are not hugely complex or too time consuming. There are many advantages of setting up a limited company in the UK.

Here at dns accountants, we can take away any work or issues with registering a company and running your company day-to-day, including:

• Company formation
• Registered office address
• Year end accounts
• Management accounts
• Tax planning
• Self assessment

Find out more about our accounting packages here.

Call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk. for help with all your company needs.

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