Becoming a Limited Company

How to Set Up a Limited Company

Once you have decided to make your new business official, your next step will be to register your business if you're not a sole trader. As a new business, setting up a limited company can be a relatively straightforward process as your operations are usually small and simple.

Read on to learn how to set up a limited company as we outline step-by-step what you need, how and where to register your business.

Before you begin

Although it is a more tax efficient way for small businesses to operate as a limited company, registering a business with Companies House can be a stressful process. We would suggest you weigh up becoming a sole trader or limited company and consider the advantages and disadvantages of each legal structure before you begin.

Step 1: Choosing a name for your business

Choosing a name can be both the most fun and most frustrating part of the process for most new limited companies. When it comes to deciding on a name for your new company, there are a few things you may wish to consider:

• Does your potential name mean something different in other countries?
• Could your potential name come across as offensive?
• Is your potential name already taken by a different business or could it be associated with another business / the government / local authorities?
• Is an appropriate URL available with your potential name?

Choosing the perfect name can be a challenging process, so we encourage you to take your time before making a decision and doing some research. Name generators are a good way of getting some light-hearted inspiration.

Bear in mind that there is a difference between a limited company’s registered name and trading name. The registered name is the one that you put down with Companies House and needs to have 'limited' in it. This can also be your trading name, which is usually what businesses tend to do. The most important thing is that it is unique. The trading name is the name that you use to trade and is also referred to as your business name. There are only a few restrictions when it comes to picking a trading name, which includes that it cannot be the same as an existing trademark and it cannot include Limited / LTD / LLP / PLC / Public Limited Company in the name.

Step 2: Appointing your company directors

Directors ensure that the company meets all its statuary responsibilities by the correct deadlines but they are not financially liable for the business as the company will have limited liability status. They can, however, be fined, prosecuted, or disqualified from being a director to companies in the future if they fail to fulfil their responsibilities successfully. Although there is no maximum number of directors that a company needs to appoint, the minimum by law is one person. The appointed director needs to be over 16 years old, does not need to be the owner of the company, and must not be an undischarged bankrupt.

As per the Government's official guidance, a director must:

• Try to make the company a success, using skills, experience, and judgment
• Follow the company’s rules, shown in its articles of association
• Make decisions for the benefit of the company, not yourself
• Tell other shareholders if you might personally benefit from a transaction the company makes
• Keep company records and report changes to Companies House and HM Revenue and Customer (HMRC)
• Make sure the company’s annual accounts are a ‘true and fair view’ of the business’s finances
• File a Company Tax Return and pay Corporation Tax
• Register for Self-Assessment and send a personal Self-Assessment tax return every year - unless you run a non-profit organisation (like a charity) and you didn’t get any pay or benefit, like a company car

You can also appoint a company secretary, but this is optional. Usually, a company secretary takes on some of the director’s responsibilities, although they cannot be a director themselves. They do not have legal responsibilities, unlike the director.

Step 3: Deciding on your shareholders

A shareholder owns either the whole or part of the business by having made an investment into the company financially or bought shares. Shareholders should have clearly defined stakes in the company, which represent their extent of ownership and level of voting right. A shareholder can also be a director and can receive payments in dividends from the company’s profits. When you register your company, you will be asked to provide information about the number of shares and their total value, and the names and addresses of your shareholders. Remember that you do not have to divide the company into equal shares. On top of this, you will also have to tell Companies House about your company’s people with significant control (PSC) register. People with significant control are people who have:

• More than 25 percent shares in the company
• More than 25 percent of voting rights in the company
• The right to appoint or remove the majority of the board of directors

Step 4: Creating and filing a Memorandum of Association and Articles of Association

The Memorandum of Association is a legal document that must be signed by all of the company’s initial shareholders. It is created automatically when you register on the Companies House website and is the agreement of shareholders to form the company.

The Articles of Association are the written rules about the running of the company, which are agreed upon by the directors and shareholders. Model articles are available as templates, or you are free to create your own.

Step 5: Keeping records

There are a number of records you will need to keep for accounting purposes and about the company, and these should be kept at your company’s registered address.

gov.uk says that company records include information about directors, shareholders, and company secretaries, in addition to:

• The results of any shareholder votes and resolutions
• Details of loans that the company has promised to repay at a date in the future and who to pay them back to
• The payments a company makes if something goes wrong and it’s the company’s fault
• Details of share transactions
• Details of loans or mortgages secured against the company’s assets

In regard to the financial and accounting records, gov.uk states that these should include information about all the money spent and received by the company, in addition to:

• Details of assets owned
• Details of debts the company owes or is owed
• Stick the company owns at the end of the financial year
• Stocktakings used to work out that figure
• All goods bought and sold (and who from and to)

Generally, it is advised to keep records for six years, but you may find that there are situations when it is better to keep them for longer. For example, if you bought something that you expect to last for six years, or if a tax return is filed late. It is not a legal obligation for your business to open a business bank account, but you may find that it is a useful tool in keeping accurate and organised financial records.

Step 6: Registering your company

You are now ready to register your business as a limited company with Companies House. When you do this, remember that you will need to put down a registered office address which should be your main business address or a director’s address. If the director feels uncomfortable stating his / her home address, you can either use a service address or a virtual office facility, as they allow you to use their address for this exact purpose.

You will also need to select a SIC code, which is a description of your business. We would advise you to combine this step with filing for Corporation Tax. A filing fee will apply at Companies House and, once the incorporation process has been successful, you will receive a Certificate of Incorporation. This will include your company name, company number, and the date it was incorporated. If you are still concerned about this process, you can also look into businesses that offer company formation support, although this is often fee-based. Some local authorities also offer guidance, which is worth researching.

It is also important to remember that there are two types of limited companies: limited by shares and limited by guarantee. A limited by shares company is a profit-making business, whereas a limited by guarantee company is normally one that is non-profit, but the process of setting either one up is practically the same. Both have limited liability status, meaning that they are legal entities in their own right. There is also a slight difference between a public limited company and a private limited company: a private limited company operates through a division of company shares that are not made available to the general public, whereas a public limited company is limited to the share capital each shareholder has.

If you are looking for more information, we suggest that you look into the Companies Act, which is the legal framework that controls how limited companies operate in the UK.