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How to set up a limited company: a step-by-step guide

How to incorporate your company in the UK and the pitfalls to avoid.
Guy Kaufman
Written by Guy Kaufman

Guy Kaufman, Startup Lead at Vestd.

Page last updated: 1 May 2024

 

When you start to build a business, one of the first decisions you'll encounter is choosing the right business structure.

Limited companies are one of the most popular business structures, with some 2.1 million actively trading in the UK.

Setting up a limited company offers several clear advantages, including asset protection, tax efficiencies and enhanced credibility in the market.

So, how do you set up a limited company? 

It’s not quite rocket science, but the process has its fair share of nuances. We'll walk you through it.

 

First things first

What are limited companies?

Limited companies are a specific type of business structure where the company is an independent legal entity separate from its owners.

This means that the company itself, rather than the individual shareholders, owns the business assets and is responsible for its debts.

One of the primary advantages of this setup is that the shareholders have 'limited liability', meaning their personal assets are not at risk if the company faces financial difficulties.

Instead, liability is limited to the value of their investment in the company - hence the ‘limited’.

Limited companies have a formal registration process, require regular financial reporting and are subject to Corporation Tax on their profits.

What is Companies House?

Companies House is the official body responsible for the registration, regulation and reporting of all limited companies.

When you decide to establish a limited company, one of your first interactions will be with Companies House. They ensure your chosen company name is unique and to officially register the company.

Then, once registered, Companies House mandates annual filings, ensuring transparency by maintaining an accessible public record of company details, from directorships to financial accounts.

Vestd directly integrates with Companies House, syncing your data directly to them with our read/write connection – an industry first. 

 

Step one: decision time

Should I set up a limited company?

Limited companies are the second most popular kind of business in the UK after sole traders.

Deciding between acting as a sole trader or limited company is the most common scenario for those embarking on a new business venture.

While sole trader structures can suit initially, they offer limited scalability for those wishing to grow their business.

Here are four key reasons why you should consider establishing a limited company if you’re embarking on a business venture:

1. Tax implications

Limited companies are subject to Corporation Tax on profits. Often, this can result in a more favourable tax situation compared to being taxed as an individual. Sometimes sole traders will set up a limited company purely for this reason.

Directors (which will nearly always include you as a founder, at least initially) can also strategise how they draw income from the company (as salary, dividends, or a combination), which might offer personal tax advantages. 

2. Funding opportunities

Limited companies have an edge when it comes to raising funds. They can issue shares, allowing them to bring in investors. It's a clear and established way to get capital into the business.

On the flip side, potential investors tend to find this structure more appealing because it's transparent, and they can clearly see what portion of the company they own.

And there are some really attractive tax incentives for investors putting money into limited companies, such as The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

3. Professional image

Incorporating a company lends a certain credibility. It signals that the business has undergone formal registration processes and meets legal criteria. For some clients or partners, this might offer assurance that they’re dealing with a legitimate and stable business.

4. Eligibility for share incentive schemes

Limited companies might be eligible for employee share schemes unavailable to other business structures.

A prime example is the Enterprise Management Incentive (EMI) scheme. It's a tax-friendly share option scheme designed to help small to medium-sized limited companies attract and retain talent by offering equity.

While not every limited company will meet the criteria for the EMI, those that do can offer share options to employees in a tax-efficient way.

Comparing limited companies to other business structures

There’s more than one way to run a business! For instance:

  • Self-employed ('sole trader'): This is the simplest structure. You're responsible for your business's debts but have less paperwork and more privacy.
  • Business partnership: Here, two or more individuals jointly run a business. Each partner shares the responsibilities, liabilities and profits.
  • Social enterprise: Ideal for those wanting to do business for social or environmental benefit. These include cooperatives, community interest companies and charities
Limited Company Sole Trader Business Partnership Social Enterprise
Legal entity
Separate from owners.
Indivisible from owner.
Not separate from partners.
Either depending on the structure.
Liability
Limited to company.
Unlimited personal liability.
Joint liability among partners.
Varies, often limited.
Tax
Corporation Tax on profits.
Taxed on personal income.
Each partner is taxed on their share of profits.
Varies, often reinvested profits.
Setup complexity
Simple for most.
Simple.
Moderate.
Moderate to complex.
Profit distribution
Retained in the business or distributed to shareholders.
Goes to the individual.
Shared among partners based on agreement.
Typically reinvested into social mission.

Funding

Grants, loans, private equity.
Personally funded, loans.
Shared contributions, joint funding, loans.
Grants, funding, and sometimes profit from sales.
Credibility
Often percieved as credible.
Sometimes seen as less credible.
Perception can vary.
Not necessarily applicable.
 

Step two: the fun part

Choosing a name for your limited company

One of the first things you’ll need to do before registering a limited company with Companies House is choose a name.

Your name will appear on reports and filing to Companies House and HMRC, payments to and from third parties and other forms of communications.

While this sets the official name your company is incorporated under, you can trade under different names - more on that below.

Companies House check and have rejected 57,000 names since 2019.

There are some fundamental naming conventions and rules to be aware of, such as:

  • Rules and regulations: The name shouldn't be too similar to an existing company's name, be misleading, or suggest a connection with the government or public authorities unless permission is granted.
  • Sensitive words: Words like “Accredited”, "British", and "Institute" may require justification or permission.
  • Transparency: Make clear the connection between your trading name and registered company name on official paperwork, invoices, and correspondence to ensure transparency.
  • Availability: Ensure your desired trading name doesn't infringe on existing trademarks or is too similar to competitors, which can lead to legal complications.

You can check company names with the Companies House online tool to check if your desired name is already in use or bears too close a resemblance to existing names.

Coming up with a winner

If you’ve already chosen a business name, ask yourself - are you willing to commit to it long-term?

Your company's name will become a core part of your brand's identity, synonymous with its mission, people and purpose. And that's hard to unravel.

Take Channel 4 and X for example - formerly known as 4OD and Twitter.

 

That being said, you can change your official registered company name later if you wish, so if you do change your mind, don't panic.

But here are some tips for getting it right first time:

  • Future-proofing: Ensure your name is flexible enough to accommodate potential future expansions or changes in business direction
  • Search existing trademarks: Before finalising a name, scan the Intellectual Property Office's database (so you won't step on any legal toes and the name is defendable against potential infringers)
  • Domain availability: Check if your chosen name, or a variant, is available as a web domain. This could be crucial for your online branding and marketing.

Trading under different names

The name you register your limited company under doesn't necessarily have to be the name you trade under, often referred to as a 'trading name' or 'business name'.

This allows entrepreneurs to trade under a more market-friendly name or even multiple names while maintaining one official registered name.

For instance, a company registered as "Smith Holdings Ltd" might simultaneously manage a café, a digital marketing agency and a clothing line.

If this applies to you, consider:

  • Brand confusion: Engaging in vastly different sectors can confuse customers if not adequately differentiated, especially if using the same trading name.
  • Financial implications: While sharing profits can be beneficial, it also means that a significant loss in one venture can impact the entire company's financial health.
 

Step three: directors

Select your company directors

For most startups, the director will be the founder - probably you, if you’re setting up the company.

Directors steer the company, making crucial decisions to ensure growth and progression and ensuring it complies with laws and regulations.

Being a director confers statutory duties and responsibilities under the Companies Act 2006, such as ensuring company accounts and reports are filed correctly, notifying Companies House of any changes within the company, and more.

Who can be a director?

Anybody really, with a few exceptions:

  • Age: A director must be at least 16 years old.
  • Disqualifications: A person who has been disqualified from acting as a director or undischarged bankrupt can only be appointed if they have court permission.
  • Not in trouble with the law: They shouldn’t be prohibited by any other legislation or agreement (e.g., a court order or probation conditions).

Taking on the role of director is not to be taken lightly. To see what's involved, see Companies House's interactive learning tool.

Do I need a company secretary?

Limited companies in the UK aren't legally required to have a dedicated company secretary unless their Articles of Association say otherwise.

As your company grows, there may be a business case for having one.

Come what may, your director (be that you or somebody else) remains legally responsible for your company’s records, accounts and performance. A company secretary is just there to support.

 

Step four: shareholders

If you have read this far, well done! It's about to get a little more complicated, so hang in there.

Shareholders vs guarantors

At the foundation of every limited company are its shareholders and guarantors. They either own a part of the company through shares or guarantee a sum of money to the company. 

Limited companies can either be limited by shares or limited by guarantee (more common for non-profits). 

Limited by shares

Shareholders are those who own shares in a company. Usually, they're the founder(s) or people who have invested money in the business in return for a portion of ownership.

E.g. an investor, a family member, a friend, etc.

However, it’s also possible to make people shareholders even if they haven't invested any capital. For example, you might reward employees with a stake in the company via an employee share scheme.

In most cases, founders start a business with their own capital and whatever they can raise from friends, family and close connections, so few startups have a fleet of shareholders or guarantors from day one.

Remember, as your business evolves, so can the structure and the people involved.

Companies limited by shares:

  • The standard setup for for-profit limited companies.
  • Liability is limited to the value of shares owned but unpaid by each shareholder.
  • These individuals or entities own a portion of the company. Their potential profit and loss in the business are proportional to their shares.
  • Major company decisions, such as mergers or winding up, often require shareholder agreement, depending on the percentage of shares they hold.
People with Significant Control (PSCs)

You must identify a Person with Significant Control (PSC). We've included this step here because a PSC is someone who owns or controls your company, which usually means: 

  • They hold more than 25% of shares in the company
  • They have more than 25% of voting rights in the company
  • They have the right to appoint (or remove) the majority of the board of directors

The PSC could be you or somebody else and you can also name more than one.

 

Limited by guarantee

Unlike traditional companies with shareholders, this format involves guarantors who commit to paying a specific amount if the company faces financial troubles or is wound up.

It's designed to protect members from personal liability while ensuring profits or surpluses are typically reinvested to further the company's objectives rather than distributed as dividends.

Companies limited by guarantee:

  • Common for charities, non-profit organisations, and clubs.
  • Instead of shareholders, they have guarantors who guarantee to pay a set amount of money if the company is dissolved with debts.
  • Don't usually distribute profits; any surplus is reinvested into the company's objectives.

The role of guarantors:

  • Often found in non-profit companies, guarantors replace shareholders to ensure their profits are directed towards their objectives rather than distributed as dividends.
  • Decide the maximum amount they're liable for if the company faces debts.
  • Guarantors commit to contributing a predetermined amount of money towards company debts up to their guaranteed amount.
 

Step five: formalise

Draft your company docs

It's time to formalise the running of your company. That means writing the rulebooks, more commonly known as the Memorandum of Association and the Articles of Association.

These papers guide the company's operations and provide a framework for its governance.

The Memorandum of Association

This document underscores your commitment to creating and running a limited company.

It details foundational information like the company's name, objectives and registered office address.

The memorandum usually contains:

  • The company's name.
  • The company's registered office location.
  • Objectives of the company (this has become more of a formality, as the Companies Act 2006 provides companies with unrestricted objectives).
  • Details of the subscribers.
The Articles of Association

This more comprehensive document lays out the rules governing the company's internal management.

The Articles of Association cover aspects like the roles and powers of directors, the rights of shareholders and the procedures for meetings and decision-making. 

It outlines how your company will operate on a day-to-day basis, ensuring everyone is on the same page. Common areas covered include:

  • The powers and responsibilities of directors.
  • Decision-making processes.
  • Shareholder rights.
  • Procedures for issuing and transferring shares.
  • How to handle dividends.
  • Procedures for annual general meetings (AGMs) and other meetings.
  • Financial record-keeping details.

While Companies House offers a model called 'Model Articles of Association', many companies opt to customise their articles to better fit their unique needs.

It's wise to seek legal advice if considering bespoke Articles of Association. 

Customers can use our Vestd model articles for free. These are based on the British Venture Capital Association’s template articles of association used by many early-stage companies.

Vestd’s Articles of Association are comprehensive but flexible, spanning 38 articles which you can read about here.

Articles of Association should be practical while offering scope for the future, which is precisely what Vestd’s model articles deliver. 

Once these documents are prepared, they must be filed with Companies House upon company registration or at the click of a button through Vestd.

It's crucial to have them easily accessible, as they might be required for reference, especially during disputes or decision-making processes.

 

Step six: record-keeping

Check what records you'll need to keep

Keeping proper records is not just a good business practice - it's a legal requirement for limited companies.

By law, directors must keep “adequate accounting records.” While the task can be delegated to another, directors remain legally liable for ensuring they’re comprehensive and well-maintained.

The exact records your company must keep will be influenced by your business activities, sector and other factors.

Company records:

  • Register of members: A list of all current shareholders or guarantors, their share count or guaranteed amount, and details of any share transfers.
  • Directors' details: Full details of the company’s directors, including their names, addresses, nationality, occupation, and other directorships.
  • Company loans: Details of any money borrowed by the company and to whom it owes money.
  • Transaction records: Details of all transactions the company has made.
  • Contracts and agreements: All business contracts, including shareholder agreements, partnership agreements, and sales contracts.

Accounting records:

  • Sales and purchases: Detailed records of all items or services sold or bought by the company.
  • Assets and liabilities: A full account of company assets (like machinery or property) and liabilities (debts or loans).
  • Financial statements: These include profit & loss statements, balance sheets, and cash flow statements. They provide an overview of the company's financial health.
  • Stocktakes: If the company holds stock, regular stock takes should be conducted, and discrepancies between the stock held and the accounts must be justified.

By law, most company and accounting records must be kept for at least six years, but some, like minutes from director's meetings, should be kept indefinitely.

While you need to maintain comprehensive records, it's equally important to protect sensitive data in line with data protection regulations, such as GDPR.

If in any doubt about any of the above, seek professional advice.

 

Step seven: make it official

Register your business

You're almost there! Registering your company is the final step in formally establishing your limited company. First things first:

Select an official address

Official communications will be sent to your registered office address, e.g., letters from Companies House or HMRC. It's also the address publicly visible on the Companies House register.

A few rules:

  • The address must be in the same country your company is registered in: England and Wales, Scotland, or Northern Ireland.* 
  • It doesn't have to be your business address, but it should be an address where you can access and respond to mail promptly.
  • Using a home address is allowed, but consider privacy implications since it's publicly listed!

*Most of the processes and regulations involved in incorporating a limited company are the same across all home nations.

Choose a SIC Code

Standard Industrial Classification Codes are used to categorise and define the nature of your business activities. Companies House uses this to understand the primary business activities of the company.

Some tips:

  • Be precise when choosing a code; it should best reflect your primary business activity.
  • You can select up to four codes if your business spans multiple sectors.

Register for Corporation Tax (CT)

Once your company is formed, it's liable for CT on its profits. You can register for CT the same time as registering with Companies House or separately with HMRC soon after your company's registration.

How long does it take to register a company?

Assuming all your details are ready to submit and you’ve chosen an available and compliant name, most companies are registered within three to eight hours. Sometimes, it can take 24 hours or longer on peak days. The registration process itself only takes about 10 to 15 minutes. 

 

Final word

We know it's a lot to take in. That's why we have made our incorporation flow on Vestd as simple as possible.

As Vestd is fully synced to Companies House, you can register your limited company and manage everything from documents to shares and cap tables, all at the click of a button.

Here’s what our Companies House integration can do for you:

  • A single source of truth: two-way integration offers a consistent and unified view of your essential company data, ensuring there's no discrepancy between your records and Companies House.
  • Automate paperwork: Say goodbye to the tedium of manual document filing. Vestd takes on this responsibility, automating the process and freeing up your time for more strategic tasks.
  • Stay ahead of deadlines: No more calendar reminders or sticky notes. Vestd will proactively notify you of upcoming deadlines, ensuring you never miss a critical tax or filing date.
  • Easy equity management: Keeping track of shareholders and equity is now a breeze. With Vestd, your cap table is digital and always up-to-date, reflecting the most recent changes and transactions.
  • Company secretarial sorted: Remain on top of reporting requirements, create and execute any board and shareholder resolutions, add and change director details, update PSCs and more with our suite of CoSec tools.

Let us help you get your new business off to a flying start!

 

Disclaimer: the information on this page was correct at the time of writing and may be subject to change. If in any doubt, seek professional advice.

 

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