Starting your own business is an exciting time and no doubt you’re eager to get started. But before you do, you must choose how to legally register your business. This is required for lots of reasons, not least so you can pay the right taxes. One of the ways you can do this is to set up a limited company.
Although it might seem daunting at first, it’s actually relatively painless. Once you’ve got it out the way, you can concentrate on the things that really matter to you.
What’s in this article?
- What is a limited company?
- How to create a limited company
- What you need to do to set up a limited company
- The costs involved
- Having directors and shareholders
- Keeping your financial records up to date
What is a limited company?
A limited company means that the business assets and income are separate from your own personal assets and income. The company is viewed in law as a separate entity to you as its owner. It has separate finances and business accounts, it has shares and shareholders, and it can keep any profits it makes after tax.
The major advantage of setting up a limited company is you’re not liable for any debts the company collects. Any losses rest with the company rather than you personally.
It does mean you have a few more accounting and legal obligations than if you operate as a sole trader. However, it’s a good way to go if you intend to grow your business into something larger down the line.
What you need to do to set up a limited company
Setting up a limited company is a straightforward process that can be done online. Companies House has simplified the stages and an application can take as little as ten minutes. There are certain rules you need to follow but beyond that, once you’ve registered with Companies House and you’ve got your company number, you can begin trading.
Choose a name
First up, you need to pick a name. This is the exciting part, as it’s your first step to becoming an entrepreneur. It could relate to your name or what you do, it could be geographical, or it could be completely random.
What it must be, though, is unique. You can’t have the same name as another registered business. If it’s very similar and someone complains, you may have to change it.
Your company name can’t be offensive or use a sensitive word or expression. You can’t imply that you’ve a connection with a local authority or government, either.
Appoint your directors
You need to appoint at least one director, which can be you or someone else. Directors have certain duties they need to fulfil, like being responsible for running the business and making sure annual accounts are filed. You can also appoint a company secretary, though it’s not compulsory.
Choose your shareholders
You can have one shareholder or hundreds, and they can also be the directors. In fact, one of them must be a director. But the simplest way to set up a limited company when you start is with you as the sole director and sole shareholder.
If you have more than one shareholder, you’ll need to figure out how you divvy up the shares and what percentage everyone gets. People with more than 25% of the shares are considered as having significant control over your company. They could be business partners if the company is a joint venture, friends or family members who’ve lent you cash, or investors.
Memorandum and articles of association
Once you’ve sorted the directors and shareholders, you’ll need to draw up a memorandum of association and articles of association. This really isn’t as daunting as it sounds.
A memorandum of association details the form your company will take and is signed by all directors and initial shareholders. It’s an important document that sets out the scope of the company such as the activities it will undertake, the liabilities of its members and the amount of capital registered. Articles of association can be thought of as a company’s user manual. It describes the rules by which your company will be run and might typically include the share structure, the organisation and company purpose.
If you register a company online, these documents are automatically generated for you. If you do it the old-fashioned way and put pen to paper, you can use a simple template. The memorandum can’t be updated once the company is registered but articles of association can.
As a small business, you really won’t need to bother much with this step. But if your company grows substantially it’s something you might have to consider down the line.
The costs of setting up a limited company
In 1975, it would cost you £50, which is the equivalent of a week’s wages, to set up your own limited company. Today, it’s a lot cheaper than that. If you want to go down the paper route, applying for a limited company costs £40. Most people do it digitally however. Providing you have everything you need to set it up, your company will be limited by shares, and you have your memorandum of association and articles of association in place, you can register a company online for a snip at £12.
Keeping the right records for your limited company
It’s vital you keep correct and up-to-date records of your business. These will be records about the company itself and the company accounts. It’s simple to take care of the day-to-day records yourself if you use Countingup, the business current account that comes with free, built in accounting software. It makes accounting for your limited company easy with receipt scanning and recording, instant invoices, notifications when you’re paid, live tax estimates, plus live profit and loss reports.
Legally, you don’t even need an accountant to fileyour annual tax return unless you’re big enough to require an audit (more than 50 employees, a turnover of more than £6.5 million and a balance sheet of more than £3.26 million). In practice, most limited companies do use one because unless you’re a financial whizz, it’s just easier to let an expert sort it for you. You’ll also need to keep a record of persons with significant control – i.e., anyone who has 25% or more of shares.
Registering your company
Finally, you get to register your company with Companies House. Its registered address must be in the UK and if you work from home, you can use your own address. You can choose to hide it on the register though, so it’s not made public.
Next, it’s time to break out the champagne and toast your new business venture!
Get on top of finances and accounting for your limited company with the Countingup app. Designed for small businesses, the unique business current account offers automated bookkeeping and simplified tax returns so that you can focus on making your dream venture a success. Find out more here.