As a business owner, you may want to learn about the business legal structure known as a limited company. A limited company has a separate legal identity from its directors and shareholders. A limited company can be beneficial, as opposed to being a sole trader, because in a limited company the owners are legally responsible for its debts but only to the extent of the money they invested, so the company is liable if things go wrong.
There are two types of limited companies: Private Limited Companies (LTDs) and Public Limited Companies (PLCs). You will learn more about these different types of limited companies below.
In this LawBite blog post, we will explain the 5 steps you need to follow when setting up a limited company in the UK.
1. Select the Type of Limited Company to Set Up
When starting the process of setting up a new company in the UK, you first need to decide what type of limited company you want to set up. If you are setting up a limited company in the UK or you have a small business, you’re a freelancer or a contractor, the most popular route is a private limited company.
2. Choose a Name for your Company
The second step for setting up a limited company is choosing its name.
Your company name should be unique, and you can use a website to find company names that are already being used. You should also trademark a company name, which is very important so that no one else can use that name for their company.
If you have chosen to start a private limited company, the name can either have Limited or Ltd in the title, for example, 'YourCompanyName' Limited, or 'YourCompanyName' Ltd.
Choosing a name for your company can be fun but challenging, just make sure you are happy with the name you’ve picked, it will appear on your building, vehicles, website and paperwork.!
>> Read more: How to register a business name
3. Choose a Director, Shareholder and Guarantors
Now you have a name and trademarks, the next step to set up a company in the UK is to appoint a director. You also need to consider who the shareholders or guarantors for your company are.
Directors are in charge of running the company. They have a number of responsibilities, including keeping company records, and reporting any changes within the company. They also have to file the company’s accounts and your Company Tax Return, and pay the Corporation Tax. They must also register for Self Assessment and send a personal Self Assessment tax return every year, unless the company is a non-profit organisation. A company director can also hire others to manage these day-to-day operations within the company.
A company secretary is not needed for a private limited company. A company secretary can also be a director, but cannot be the company’s auditor.
>> Download for free: Shareholders' Agreement template
A limited company requires at least one shareholder, who can also be a director. During the process of registering your company, you need to state the number of shares and their total value (share capital), as well as the names and addresses of your shareholders.
If you are looking to take advantage of advantageous investment programs such as EIS and SEIS, you may want to prepare for this before you allocate shares. Speaking to an expert corporate lawyer can ensure you order things correctly.
>>Read more: Why shareholder agreements are important?
4. Set up your Limited Company
The next step is opening a limited company in the UK. You need to provide details such as:
- What type of business your limited company will be. This is done by providing a SIC (Standard Industrial Classification) code for your business.
- Addresses you wish to register for your business.
- The ownership of your company, the number of shareholders and how many shares they will have.
5. Finish the Incorporation Procedure
The Incorporation Procedure is finished by submitting the following documents to Companies House (the company which is responsible for limited company registration in the UK). These documents lay out how you are going to run your business:
- Memorandum of Association: it is a legal document signed by all your shareholders agreeing to form the company. It involves your limited company name, location and business type.
- Form 10: includes the director's names, addresses and registered limited company address.
- Form 12: states that the limited company in question complies with the terms and conditions of the Companies Act.
- Articles of Association: written rules about running the company, agreed by the directors and shareholders.
After this, your limited company is all set up! You should keep any records about the company, as well as financial and accounting records so you know your responsibilities.
The Advantages and Disadvantages of Setting a Limited Company in the UK
There are advantages as well as disadvantages of setting up a limited company in the UK.
One major advantage of a limited company is that the owner is only liable for the money they put into the company. Thus, they only risk their investment, and their personal finances are protected if the business suffers any debts. This is known as limited liability.
Also, compared to a sole trader, a limited company is more likely to be tax efficient. You can also maximise tax-free income, by having members of your family such as your husband/wife as shareholders, so each person can take the tax-free salary for the year (for 2020/21 this is £12,500).
Also, limited companies have more prestige and professionalism in the business world, making them more likely to attract business and clients.
One disadvantage of a limited company is that they can be complicated to set up, as they need to be registered with the Companies House (find more information at the Companies House Website). You will also need to pay to set up a limited company.
Also, as there may be multiple shareholders as opposed to a sole trader being run by one person, all the shareholders have a say in how the business is run. This means the running of the business may get complicated as everyone’s opinions need to be taken into account.
Lastly, your company may have less privacy than if you were operating as a sole trader, because you provide information to the Companies House, which can be seen by anyone.
Is setting a limited company the best option for you?
Reading this blog post, you may be wondering if setting up a UK limited company is the best option for you. Some examples of limited companies include plumbers, hairdressers, photographers, and construction companies.
Before setting up a limited company, you should consider the type of business you are looking to start, as well as any costs and benefits associated. If you are unsure, it’s always a good idea to seek professional guidance.
LawBite has teamed up with Tide
LawBite has joined forces with Tide, the digital challenger bank that focuses on SMEs - trusted by over 300,000 businesses across the UK.
Tide is offering:
- Free company formation & registration
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- £100 credit to the new account
Related Articles
Free template: Limited Liability Partnership (LLP)
LawBite’s mission is to democratise how SMEs get the expert law they need - easier to access, clearer to understand, and much more affordable. We connect you with the best lawyers to give you top-class legal advice. If you were wondering how to set up an Ltd company or have questions about your business structure, we hope this blog has been helpful in addressing the steps involved in going about this, as well as the advantages and disadvantages associated.
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LawBite’s mission is to democratise how SMEs get the expert law they need - easier to access, clearer to understand, and much more affordable. We connect you with the best lawyers to give you top-class legal advice. If you were wondering how to set up an Ltd company or have questions about your business structure, we hope this blog has been helpful in addressing the steps involved in going about this, as well as the advantages and disadvantages associated.
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