How to set up a limited company

When you choose to go it alone and start your own business, it can all seem a bit overwhelming. Do you become a sole trader? What about registering as a limited company? What are the differences? When is the best time to switch?

If your mind is racing with these kinds of questions, you’re not alone. Today, we’re uncovering everything you need to know about setting up a limited company, including what exactly it is, how to go about it, and whether it’s a good fit for you.

What is a limited company?

Let’s start with the basics.

A limited company is a type of business structure where the company has a separate legal identity to its owners.

This is where having a limited company differs from being a sole trader, as the latter essentially ties you to your business legally and financially. As a sole trader, you are your business. A limited company is separate to you.

The benefits of going limited

There are a number of valuable benefits that come with “going limited”.

The most powerful benefit is ‘limited liability’. This is where the financial liability of each shareholder is limited to the amount they have invested in the company. It also means that if a company with limited liability is sued, then it’s categorically the company being sued, not the owner. Having said that, there are exceptions to this rule. For example, company directors can be held personally liable in cases of wrongful and/ or fraudulent trading.

Starting a limited company can also be a more tax efficient option than becoming a sole trader. It also gives your business a more professional feel, which can open up more opportunities and bring in more funding and investment in the long run.

You can see a more extensive list of the advantages and disadvantages of setting up a limited company in this post.

Limited companies can be divided up into two distinct groups:

1. Limited by shares

Limited by guarantee tends to refer to not-for-profit organisations, such as charities and associations that don’t have shares or shareholders. Instead, they have members who act as guarantors.

2. Limited by guarantee

Limited by guarantee tends to refer to not-for-profit organisations, such as charities and associations that don’t have shares or shareholders. Instead, they have members who act as guarantors.

Choose between a private and public limited company

You’ll need to decide whether you want to (or can) set up a private or public limited company.

The majority of small businesses are best off forming a private limited company. Both private and public limited companies are owned by the shareholders who put money into the business. To set up a public limited company, there needs to be a minimum of £50,000 invested as share capital. For private limited companies, there is no minimum.

There are a number of other differences between the two that are worth considering before you make a decision. These include:

Submitting tax returns: public limited companies must submit their returns within six months following the company’s accounting year-end. Private companies can submit them up to nine months afterwards.

Number of shareholders: private limited companies only need one shareholder and one director (who in most cases is the same person). Public limited companies have to have a minimum of two shareholders and two company directors.

Company secretary: public companies must appoint a legally qualified secretary. Private companies are not required to appoint a company secretary.

Trading start date: a private limited company can start trading as soon as it has been incorporated. A public limited company must wait for a trading certificate first.

Raising capital: public limited companies are able to raise capital from the general public, whereas private limited companies cannot.

Annual General Meeting (AGM) : public companies are required to hold an AGM, which is not the case for private companies.

Choose a company name

Once you’ve decided whether you’re best setting up a private or public limited company, then the fun can begin.

When you register a limited company, you have to register its name with Companies House. If you’ve already got a name in mind, run a quick search on the Companies House website to see if there’s a business already using that name as you can’t double up.

As well as no repeat names, there are several other rules that are in place:

• Every limited company must include a “Limited” or “Ltd” suffix after its name (for example, if your business is called Cool Cakes, you would have to register it as Cool Cakes Ltd or Cool Cakes Limited with Companies House).
• You can’t use offensive, abusive, or sensitive words in your company’s name unless you’ve received official permission. A list of these words can be found in the Companies House Guide to Incorporation and Names.
  
• Avoid choosing a name that includes trademarked words otherwise you might find yourself in trouble later down the line. You can run a search through the UK’s Intellectual Property Office’s Trade Mark Register to double check.
  

These are the hard and fast rules, but there are some other things to bear in mind when choosing a company name.

For example, it’s a good idea to secure a matching domain name for your company. This will help you with branding and ensure you have an email address that matches your company name.

We have a helpful guide to naming your business here.

Register your limited company

Now it’s time to officially register your limited company.

You can either do this yourself or through a formation agent, an accountant, or solicitor. You can find a list of formation agents on the Companies House website.

If you decide to do it yourself, you can do it online through this government portal.

Firstly, you’ll need three pieces of personal information about yourself and any shareholders or guarantors. These can be:

• The town where you were born
  
• Your mother’s maiden name
  
• Your telephone number
  
• Your national insurance number
  
• Your father’s first name
  
• Your passport number

Once you’ve confirmed your identity, you’ll need to submit the following two documents:

1. Memorandum of Association, for which you’ll need to provide the following information:

• The name you’d like to register your company as.
  
• The registered office address of your company.
  
• Details of company directors including a service address where they can be contacted.
  
• Details of all people with significant control over the company, for example anyone with over 25% of the company’s shares or voting rights.
  
• The amount of share capital issued and how it’s divided between shareholders.
  
• The trading activity of the company, which is done by selecting a classification code known as the SIC code. A list of SIC codes can be found on the Companies House website.

2. Articles of Association, which outlines how the company should be run, how decisions are made, the rights and responsibilities of directors and shareholders etc.

You don’t need to write these documents yourself. The Memorandum of Association will be created automatically during the online registration process. As for the Articles of Association, you can choose from a range of standard articles on the Companies House website.

When the company has been registered, you will receive a Certificate of Incorporation from Companies House. This document includes the date of incorporation and your company registration number, which you’ll need for future accounts and tax returns.

The cost of setting up a limited company

There are three tiers of pricing when it comes to setting up your limited company. The option you choose will depend on how much advice you need and whether you have the time and resources to do it yourself.

It costs £12 to register a company yourself. Your company will usually be registered within 24 hours.

It costs about £25 to use a formation agent.

Costs can vary when using an accountant or solicitor, but will likely be considerably higher than doing it yourself or hiring a formation agent. However, if you need advice and a helping hand, this might be the best option.

Your duties and responsibilities as a director of a limited company

Congratulations - your limited company is now registered. For the most part, you can go about running your business as normal, but there are a few duties and legal responsibilities that are now added to your plate as a company director:

• You must file your annual accounts and confirmation statement with Companies House every year.
  
• You must send your annual accounts to HMRC and pay them any tax owed within nine months of your company’s accounting year-end.
  
• You must register for Self Assessment and send a personal tax return to HMRC every year.
  
• You must keep company and accounting records for a minimum of six years from the end of the company’s last financial year-end (or even longer in some circumstances).
  
• You must follow the company’s rules as per its articles of association.
  
• You must tell other shareholders if you personally benefit from any transactions the company might make.
  

This might seem like a lengthy list of responsibilities, but don’t let that put you off as there are many benefits to having a limited company over being a sole trader.

You can hire the help of an accountant to keep your accounts in order, but remember that you are still legally responsible for maintaining and keeping company records and accounts.

If you don’t keep up your duties and legal responsibilities as a company director, you can be fined, prosecuted, or even disqualified.

Things to consider after forming a limited company

Your limited company is all set up and ready to go - now what? Here are some next steps it’s worth thinking about.

Business bank account

Having a separate business bank account is mandatory if you have a limited company as your company is a separate entity to you. This means you can’t use your personal bank account. There are numerous options available, including app-based accounts. Check out our review of business accounts here.

Business insurance

Depending on the type of business you’re running, you might need business insurance to cover your activities. You can find out if your business needs insurance by reading this post.

Register for VAT

If your annual turnover is over £85,000, you will need to register your company for VAT. Under certain circumstances, you may decide it’s in your interest to voluntarily register for VAT even if your annual turnover is below the threshold. If you do register for VAT, you’ll have to submit quarterly VAT returns using accounting software that’s compliant under the new Making Tax Digital scheme.

Is it time to go limited?

For many businesses, choosing whether to register as a limited company is a difficult decision. It can seem like there’s a ton of hoops to jump through to get there, which is why a lot of small business owners often choose to stay sole traders for longer.

However, while it might seem like less of a headache initially, staying a sole trader might not be the most beneficial option for your business. Becoming a limited company can save you money on tax and give your business a more professional feel. On top of that - and probably the biggest benefit - you are considered a separate legal entity from your company.

In the end it’s your decision. Now you’re armed with all the information you need, you can decide for yourself whether becoming a limited company is the best option for you.