Limited company formation in the UK

• 1. Decide if it’s really a limited company that you need: A little thought at the beginning to whether a limited company or sole trader would be best option for your business would not only help you to start in a proper manner but will also save you from spending endless hours on the phone to HMRC, completing and resubmitting forms and all in all it will save you tearing your hair out.
• 2. Choose a good company name: A good name can be a real asset to your business however; you need to follow certain rules before you zero down on one. There are a number of rules governing what can be chosen as a company name when you register a new company, the most important being that it’s different from any company that already exists.
• 3. Assemble all details needed to register the company:

  You can refer to the checklist for registration of new company for the full list, but the information mostly needed is :

  • a. Name of the company.
  • b. A UK registered office address.
  • c. Anticipated activities of the business need to be listed down.
  • d. Details of share capital
  • e. Company director and if required, company secretary details.
  • f. Initial shareholder details
• 4. Prepare Memorandum and Articles of Association: Articles of association form the rule book of the company which defines how the company is to be run by the directors. Memorandum is a short document which includes no of standard clauses and subscribers to the initial shares. Memorandum and articles of association collectively make up the constitution of the company.
• 5. Register/File the incorporation with Companies House: Once you have collected all the relevant information and documents, you need to send it to the Companies House for their approval and for issue of Certificate of Incorporation. For the same, there are 3 different options, for which different fees are charged by the Companies House:
  • a. Apply online through their dedicated software – the standard fee is £10.
  • b. Web Incorporation through Companies House’s online portal – the standard fee is £12.
  • c. Paper filing the IN01 form – the standard fees is £40
  • d. The fees for submitting your company incorporation is £15 and there will be additional fees charged for your broadband or telephone charges. All company incorporation documents are subject to checks and once all documents satisfy all the required and appropriate examination and company name checks, your company gets incorporated at the Companies House and a Certificate of Incorporation is issued.
• 6. Wait for the approval: Once you are done with the registration process as listed above, you have to wait to operate the business until you receive the approval from Companies House. If you have registered your company using paper forms, the process of approval will take longer as compared to online options.
• 7. Conduct Company’s first board meeting: It is always best to hold a meeting of the directors to cover some of the necessary formalities within a few weeks of registering the company.
• 8. Set up company registers:

  Once your company is registered, you would be required to set up and maintain company books, which include:

  • a. Register of Directors and their residential addresses
  • b. Register of Secretaries.
  • c. Register of Members/Shareholders.
  • d. Register of People with significant control
  • e. Register of Allotments of Shares
  • f. Register of Share Transfers
  • g. Register of Mortgages and Charges
• 9. Other tasks:

  There are number of important tasks you will need to consider, which might include :

  • a. Setting up a bank account.
  • b. Registering with HMRC, which might include registering for VAT.
  • c. Setting up a website, if you want your customers to find you online.
  • d. Registering a trademark, if you think it’s important for your business.

There are a number of advantages associated with a limited company. Some of these are as follows

• 1. It's quick and easy to start with: The Companies Act 2009, which was effective from 1st October 2009, made it easier to run a limited company and it can be done online now.
• 2. It has a separate legal entity: Limited Companies enjoy permanent succession because they have their own legal entity and thus, even if the shareholders and employees leave the company, it does not affect the company. Since it has its own separate legal entity, then in the event of a death or resignation, the shares are allocated to remaining members. Discontinuation of the private limited company occurs only in case of dissolution or liquidation or by the order of the courts or Registrar of the Companies.
• 3. It has limited liability: The biggest advantage of a limited company is its limited liability feature. Limited companies are treated as a single entity and thus in case of any debts, company is responsible for it i.e. in case if a company is unable to pay its debts, the shareholders will have to pay as per their share of contribution (nominal value of their shareholding) which can be as small as £1. So, with the private limited structure, you can take more calculated business risk without the fear of losing everything to uncertain and unexpected situations.
• 4. Greater opportunities for tax planning: One of the main advantages of forming a limited company is that it provides greater opportunities for tax planning and is subject to lower corporation tax. Corporation tax is applicable at the rate of 19% on the profits, irrespective of the amount of profit, which is not the case with the sole traders. Dividends are one of the ways through which directors can make more tax savings.
• 5. Professional status: There is no doubt that on the sound of "limited", adjectives like "credible" , "permanent" , "reliable" get automatically attached with the name of the company and hence enhances its credibility. It gives a sense of confidence and incorporating a business as a limited company can open up more business avenues.
• 6. Set up of dormant companies: In case you have an idea/name for a business but not yet the time and capital to develop it, you can set up a company with the desired name and keep it dormant, i.e. no trading in that particular financial year.
• 7. Better control over your finances: Setting up a limited company means you are dealing with the clients directly and have control over your business and finances. Whereas, in case you are using the services of an umbrella company, you have to rely on the umbrella company for your earnings.
• 8. Raising funds:

  In the case of a public limited company, you can raise large sums of money because there is no limit to how many shareholders a public limited company can have.

• 9. Liquidity for shareholders:

  Shares of a public limited company are easily transferable and thus provides liquidity for its shareholders.

• 10. Exit strategy:

  Going public can enhance the options for the founders to exit the business at some point in the future, if they wish to do so. Both higher transferability of shares and the increased visibility of the business and its performance may increase the chances of bid interest from potential suitors.

There are a number of advantages associated with a limited company. Some of these are as follows

• 1. Restricted capital raising: In case of a private limited company, there is a restriction on the number of shares you can sell.
• 2. Dilution of powers: In case of a public limited company, interest/opinion of its directors and shareholders may vary at times and the flexibility of selling as many shares as possible invites more opinion and thus can dilute management over a period of time. Size of the public limited companies is huge and may face management problems like slow decision making.
• 3. Complex accounts: In case of a limited company, rules governing the accounts and bookkeeping are more complex than what they are in case you are a sole trader.
• 4. Registration with the Companies House: A trading certificate/incorporation certificate must be obtained from the Companies House for a limited company to start trading.
• 5. Higher level of transparency: Limited companies, whether public or private, have more of their details in public via Companies House, than any other business types. However, the level of transparency is much higher for public limited companies.
• 6. Restriction with the company name: In case you have decided to start your business as a limited company, you cannot name the business as per your wish. You need to check with the Companies House for the eligibility and availability of that particular name and in case it’s already taken, just too bad. You have to think of an alternate name.
• 7. In case of a public limited company: you need to have at least 02 shareholders and the company’s secretary must be certified.
• 8. Directors’ responsibilities: In case of a limited company, it is the duty of the director to file statutory documents to the Companies House and it is observed as a criminal offence in case there is failure to do the same, apart from attracting late filing penalties.
• 9. Cost of setting up a limited company: A limited company is more expensive to set up than a sole trader or partnership.
• 10. Administrative responsibilities: In case of a limited company, administrative responsibilities are much more than what is there in case of a sole trader or partnership. Its directors and shareholders have to complete their tax returns in addition to the tax return of the company. Apart from this, there are a minimum number of meetings which a limited company needs to have with its shareholders.

Once you have decided to be your own boss, you then need to choose the best structure for your business, in terms of whether you want to start either as a Limited Company or as a sole trader and the decision should be made well in advance before you start trading. This decision is very much dependent on your future plans and current situation, however, the structure you chose will have an impact on how you pay the relevant tax to Her Majesty’s Revenue and Customs (HMRC).

There are a lot of factors which come into play while you decide on the structure of your business like tax implications, the legal entity, ownership and liability. You can start your business as a limited company or as a sole trader etc. However, the benefits associated with the limited companies are much more than any other structure and it gives you the opportunity to explore more avenues of the financial world.

Whichever path you choose, it is important to understand that it’s not your final decision and you can change it at a later stage. However changing the structure is neither an easy nor a simple task. So, it is highly recommended to take as much time as you want but when you start, you should start with a clear and focused mind.