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How set up a limited company

A step-by-step guide for startups

 

Getting started

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, with some 2.1 million actively trading in the UK right now.

Setting up a limited company offers several advantages (which we'll cover in this guide).

It’s not rocket science, but the process has its fair share of nuances. Making the right decisions now will get your business off to a flying start for now and the future.

We’ll show you exactly how to do it and help you avoid the most common pitfalls.

 

What are Limited Companies? A quick explanation

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 before going any further.

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 connects to Companies House, syncing your data directly to them. An industry first!

 

Is setting up a limited company right for you?

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

The legal separation granted by the limited company structure provides limited liability protection, meaning, in most instances, your personal assets are shielded from business liabilities. 

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:

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.

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 more easily. It's a clear and established way to get capital into the business.

Potential investors usually find this structure more appealing.

3. Credibility

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, it reassures them that they’re dealing with a legitimate business. That's not to say that sole traders aren't, but limited companies might have an edge here.

4. Share scheme eligibility

Some limited companies are eligible for share schemes that are unavailable to other business structures.

A prime example is the Enterprise Management Incentive (EMI) scheme. It's a tax-advantaged 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 manner.

 

Limited companies vs other business types

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.

Unincorporated association

Often used by groups pursuing a common non-business goal, like a sports club or community group.

LIMITED COMPANY SOLE TRADER BUSINESS PARTNERSHIP SOCIAL ENTERPRISE

Legal entity

Separate from owners.

Indivisible from owner.

Not separate from partners.
Depends on the structure.
Liability
Limited to company.
Unlimited personal liability.
Joint liability among partners.
Varies, often limited.
Taxation
Corporation Tax on profits.
Taxed on personal income.
Each partner is taxed on their share of profits.
Varies, often reinvested profits.
Setup complexity
Low to moderate.
Low.
Moderate (partnership agreements needed).
Moderate to high (legal & ethical guidelines).
Profit distribution
Can be retained in the business or distributed to shareholders.
Goes to the individual.
Shared among partners (outlined in agreements).
Typically reinvested into a social mission.
Funding
Equity financing, debt financing, grants and schemes.
Personal funds, bank loans.
Shared contributions, joint funding, loans.
Grants, funding, and sometimes profit from sales.
Credibility
Often viewed as more credible.
May be seen as less credible.
Perception can vary.
Not necessarily applicable.
 

What to call your limited company

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

This is the exciting part!

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).

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

  • Uniqueness: 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 see if your desired name is already in use or bears too close a resemblance to existing names.

Companies House will check! Since 2019, they've rejected 57,000 names.

One company, multiple ventures

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.

What to think of when thinking of a name

If you’ve already chosen a business or brand name, now is the time to ensure whether it’s the right name to commit to in the long term.

While you can trade under a different name from the one you select to register at Companies House, it’s typically advised they align to avoid confusion.

You can change your official registered company name later if you wish, so if you change your mind or business direction, don’t panic!

Here are three tips to help you get it right the first time:

  1. Future-proofing: Ensure your name is flexible enough to accommodate potential future expansions or changes in business direction.
  2. Search existing trademarks: Before finalising a name, scan the Intellectual Property Office's database. This ensures you won't step on any legal toes and that your name is defendable against potential infringers.
  3. 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.
 

Choosing directors

Directors are at the helm of your business. For most startups, the director will be the founder - probably you, if you’re the one setting up the company.

Directors help steer the ship, making crucial decisions in the company's best interests. But it's not all fun and games; directors have legal responsibilities.

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?

  • 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.
  • Legal health: They shouldn’t be prohibited by any other legislation or agreement (e.g., a court order or probation conditions).

You must appoint a director but it's up to you whether you have a company secretary too. 

 

Shareholders and 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.

To understand their roles, you first need to get to grips with limited by shares and limited by guarantee.

Limited by shares

Shareholders are those who own shares in a company. In many cases, this is people who have invested money in your business in return for a portion of ownership. This could be you, an investor, a family member, a friend, etc.

For-profit companies tend to be 'limited by shares'.

It’s also possible to make people shareholders when they’ve not invested anything. For example, you might employ someone but not have the funds to pay a competitive salary, and so, offer equity to compensate for that.

For startups, especially those bootstrapping or in their early stages, shareholders might simply be the founders themselves. In most cases, founders start a business with their own capital and whatever they can raise from friends, family and close connections.

Not all startups will have a fleet of shareholders or guarantors from day one. It's a choice that depends on your business plan, funding needs, and growth strategy.

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

So, to round up, 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.
Issuing shares

There are a few steps to consider here including:

  • The number of shares in the company: 100,000 or one million shares works well as this makes it easier to issue new shares to people later.
  • Share value: Directors decide the nominal value (face value) of each share. This can be anything, but with the numbers above in mind, between £0.000001p per share to £1 per share is best.
  • Share types: Determine if you want different classes of shares, e.g., ordinary, preference, or redeemable shares. Each comes with its own rights and restrictions.
  • To add a shareholder to a limited company: First, secure board approval and any necessary consent from existing shareholders.

Next, either issue new shares or transfer existing ones, then update the company's member register. Notify Companies House if issuing new shares, and provide the new shareholder with a share certificate.

Vestd seriously simplifies the process of issuing shares and updating Companies House. And our free Equity Fundamentals guide is well worth a read too.

Dividends and taxation

Depending on the type of shares they hold, shareholders can receive a portion of the company's profits as dividends. It's vital to understand:

  • Payment frequency: Typically, dividends can be paid monthly, quarterly, or annually.
  • Tax implications: Dividends are subject to different tax rates than regular income. Familiarise yourself with these rates and thresholds to stay compliant.

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.

Non-profit companies tend to be 'limited by guarantee'.

In summary, companies limited by guarantee:

  • Are 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.
 

Draft foundational documents

Your next step is to agree on how the company will run and get that in writing.

There are two essential documents to factor in: the Memorandum of Association and the Articles of Association. They act as the rulebook for your company.

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.

Customers can use our Vestd model articles for free. They're comprehensive and flexible, and so, practical for the future.

And based on the British Venture Capital Association’s template used by many early-stage companies.

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.

 

Check what records you'll need to keep

Keeping accurate records is good business practice - to inform decision-making, ensure legal compliance, and offer transparency to stakeholders.

But, more importantly, it's a legal requirement for limited companies. By law, directors must keep “adequate accounting records.”

While the task of bookkeeping and filing can be delegated to another, directors remain legally liable for ensuring they’re comprehensive and well-maintained.

The exact records you'll need really depends on the business, but as a starting point:

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 and 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. 

It's equally important to protect sensitive data in line with data protection regulations, such as GDPR.

 

When it’s time to register your company

Registering your company is the final step in formally establishing your limited company. 

Select an official address

Official correspondence from Companies House and HMRC will be sent to your registered office address. 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 - anyone can see it!
*FYI: The incorporation process and regulations are pretty much the same for these nations.

Choose a SIC Code

Standard Industrial Classification Codes (SIC) are used to categorise and define the nature of your business activities.

  • 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 with HMRC

Once your company is formed, it's liable for Corporation Tax (CT) on its profits. You can register for CT at 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

 

What's next?

So, let's recap!

Setting up a limited company is a right of passage for any budding business owner or startup founder.

While exciting, it’s crucial to not rush this process. There are many aspects to incorporating your business, and taking care here might save you from headaches later on.

Vestd simplifies the process, enabling founders to hit the ground running.

No more drowning in tedious paperwork, fiddling over shares and cap tables or missing important deadlines! Kick-start your company with Vestd today.

 

Sync up with Companies House

Here’s what Vestd's two-way integration with Companies House can do for you:

  • A single source of truth for all your key data: Eliminate discrepancies between your records and Companies House.
  • Automate paperwork: Say goodbye to the tedium of manual document filing. Free up your time for more strategic tasks.
  • Stay on top of deadlines: No more calendar reminders or sticky notes. Get notified of upcoming deadlines, ensuring you never miss a critical tax or filing date.
  • Digital equity management: Keeping track of shareholders and equity is now a breeze. View an accurate, digital cap table that automatically updates to reflect the recent changes and share movements.
  • Boost efficiency with CoSec tools: Update your company name or your directors’ details, generate confirmation statements, store documents in a secure vault and more.

All at the click of a button! We equip businesses of all types with the tools they need to get off to a flying start.

See it for yourself. Book a demo today.

 

Frequently asked questions

 

Make it happen

Make it official. Set up your UK limited company today. 

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