Setting up a limited company
When you first set up in business it’ll most likely be as a sole trader, which means you’re essentially self-employed. However, after you’ve been trading for a while it may make more sense to set up a private limited company.
Why set up a limited company?
The main disadvantage of being a sole trader is that your personal finances aren’t fully separated from your business finances. This means that if your business runs into difficulties or is sued, your personal assets are at risk.
The big advantage of a limited company is that it ensures limited liability. The company is a separate legal entity (it has its own bank account etc.) so as company director, you can’t lose more than the face value of your share in the business.
Another good reason for setting up a company is that companies pay a lower rate of tax. Find out more about this.
What do I need to do before I register?
Before you can register a private limited company, you need a number of things:
- a unique name for your business (ending in Limited or Ltd, although you can trade under a different name)
- a registered address
- a standard industrial classification of economic activities (SIC) code (this identifies what your company does)
You must also decide how many directors you will have. A director is someone who’s legally responsible for running the company. You will be one (the minimum number allowed!) – do you want any others?
Similarly, decide how many shareholders you will have. Presuming that you will be the main shareholder, will anyone else own a percentage of the company?
All shareholders must agree to create the company and the written rules (aka the memorandum and articles of association). You must also have details of anyone with significant control over your company (e.g. anyone with a share of 25 per cent or more).
How to register a limited company
First, register your company with Companies House. You can do this online or by post using form IN01. If you choose not to use ‘limited’ in your company name you must register by post. The company will usually be registered within 24 hours of receipt of your application, if you do it online. Postal registrations can take up to 10 days.
Once you’ve registered your company, a ten-digit Unique Taxpayer Reference (UTR) will be posted to your company address within a few days. You’ll need this, so keep it safe. You will also receive a ‘certificate of incorporation’, confirming that the company legally exists. This document also includes the company number and date of formation.
How much does it cost to register a company?
It costs £12 to register your company online. Postal registrations normally cost £40, though you can pay £100 for a same-day postal registration if you wish.
What do I need to do after I’ve registered?
Once your company is registered with Companies House, you must register it for corporation tax within three months of it becoming active (you can do both registrations at the same time). Being active means that your business is providing services and receiving income. If you’re unsure if this applies to your company, check with your accountant. If you register too late for corporation tax, you could receive a fine.
You will need to file a company tax return annually, by the deadline given to you by HMRC. You’ll also need to register for PAYE if the company pays any salaries (including your own as Director).
Legal responsibilities of running a company
As Director you’ll have some legal responsibilities, including managing accounts and informing other shareholders if you stand to benefit personally from any company transactions. You can of course appoint an accountant and/or company secretary to perform these tasks on your behalf – just remember that the buck stops with you.
If you’re setting up a company from scratch (i.e. you’re not already established as a sole trader) then you may also like to consult our guide to starting a business.
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