Nearly 5 million companies in the UK are registered at Companies House, with over 800,000 new companies incorporated each year. Many people have a great business idea and want to start a new business venture, but how easy is it to set up a new business in the UK?
There are various ways to set up a business in the UK, from simply setting up as a sole trader to setting up a limited company that you register your business with Companies House. Limited companies have their own rules and regulations.
In this blog we predominantly cover the setting up a limited company but touch on others ways to start a business in the UK. If you are considering starting a business in the UK, then read on.
Deciding your business structure
There are many types of ways that you can start a business in the UK. The most common types of business are:
- Limited company - registered with Companies House in the UK and a separate legal entity from you as an individual.
- Sole trader - the simplest way to start a business but no legal distinction between you and your business.
- Business partnership - In a partnership, you and your partner (or partners) personally share responsibility and legal liability.
Setting up a limited company in the UK
What is a limited company?
A limited company refers to the business structure where the financial and legal entity is different from the person or owner of the business. Setting up a private limited company will provide limited liability to the shareholders. Therefore, when the business incurs any loss or fails, you will be liable only for the face value that is your share in the company.
The limited company is different from its board of directors. A private limited company has to have all its financial matters dealt with via business bank accounts, which are separate from the shareholders bank accounts. The company is liable for paying corporate tax and can be sold or bought depending on the shares. A private limited company must be registered at the Companies House in the UK.
What is Companies House in the UK?
Companies House in the UK play a key role in keeping registration details of all UK limited companies. You cannot set up or dissolve a limited company or Limited Liability Partnership (LLP) in the UK without informing Companies House.
The main functions of Companies House are to:
- incorporate and dissolve limited companies;
- examine and store company information as per the Companies Act and other legislation; and
- make this information available to the public.
In addition to company incorporations and registering limited companies, Companies House also provide services around dissolving companies, help you find a UK company online, examine company records, file company accounts and many more online services.
How to set up a limited company with Companies House in the UK
To set up a limited company, you need to register it with Companies House in the UK. The process of setting up a new company is called company formation. When you register a new company, this registration is called incorporation. An individual can register their limited company online or via post. Heres the steps you need to take to set up a limited company in the UK:
Choose which type of limited company to set up
Once you’ve decided to set up a limited company, you have to choose which type of company to form. The types of company you can register with Companies House are:
- Public limited company (PLC)
- Private limited company by share.
- Private unlimited company.
- Private limited company by guarantee ( no share capital )
- Limited liability partnership.
- Limited partnership.
Pick your company name
Like a website address, your company name must be completely unique.
There are restrictions on the type of name you can use to register your limited company. The name must:
- End with ‘Limited’ or ‘Ltd’ (or the Welsh equivalents ‘Cyfyngedig’ or ‘Cyf’)
- Be unique, and not use special characters or punctuation to create a name which is otherwise similar to one already registered
- Not be offensive or use sensitive words or expressions
- Not suggest any sort of official accreditation or connection to the government unless you have permission
If you plan on trading overseas at any point, it might also be worth checking that your business name can cross the border without causing any offense in a different language and culture!
Here at dns accountants, we can assist with the company formation and incorporation process on behalf of the business.
Information you will require to register a company
You’ll need at least 3 pieces of personal information about yourself and your shareholders or guarantors, for example:
- Town of birth
- Mother’s maiden name
- Father’s first name
- Telephone number
- National insurance number
- Passport number
You’ll need to create a Government Gateway user ID and password for your company when you register it. You cannot use your personal Government Gateway ID.
Things to complete
- The type of business activities your limited company will carry out by choosing a SIC code (Standard Industrial Classification code) for your business. You can select the most appropriate code from the SIC code list online.
- The addresses you want to register for your business. You’ll need a registered office address and provide a service business address. You can use your residential address for both, but you can protect your privacy by using a separate registered office address. Here at dns accountants, we offer a registered office address service.
- Decide on the ownership of your company – how many shareholders and how many shares they will each have.
- Nominate a person with significant control.
Choose directors and a company secretary
A director is one of the essential requirements of a business. You require at least one director, but you can opt to have more than one.
A part from a Director, many business owners also consider hiring a Company Secretary. The Company Secretary will look after the directors orders and ensure they are followed. It may be worthwhile registering your spouse as a company secretary, so they can deal with Companies House if anything happens to you.
Choose the shareholders
The shareholders are a vital part of any business. You need at least one shareholder or guarantor, who can be a director.
The shares are initially divided among the directors. Any shareholder with more than 25% shares is known as the Person of Significant control.
Identify a person with significant control
A person with significant control (PSC) is someone who owns or controls your company. They’re sometimes called ‘beneficial owners’.
You must identify your PSC and tell Companies House who they are. This might be you, or someone associated with your company. A company can have one or more PSCs.
You must record their details on your company’s PSC register, and you’ll need to include this information when you set up (incorporate) your company.
Preparing documents needed to form a UK limited company
To complete the incorporation process, you will need the following documents:
- Application to register a company and the fee.
- Memorandum of association.
- Articles of association (unless you adopt model articles in their entirety).
Ensure you keep the right company and accounting records
You must keep:
- records about the company itself
- financial and accounting records
Speak to dns accountants today who can handle all the relevant records you need to keep and all your accounting responsibilities.
Corporation Tax registration
Most people can register for Corporation Tax with HM Revenue and Customs (HMRC) at the same time as registering a company with Companies House. You need to register for Corporation Tax within 3 months of starting to do business.
When registering, you’ll need to tell HMRC:
- Your company’s registration number
- The date you started to do business (your company’s first accounting period will start from this date)
- The date your annual accounts are made up to
HMRC will tell you the deadline for paying Corporation Tax.
You’ll need to file a Company Tax Return, even if you make a loss or have no Corporation Tax to pay.
Deciding whether to register for VAT can be a key decision particularly for business start-ups.
Businesses can register voluntarily, but whether it is advantageous to register is a crucial management decision.
Businesses must register within 30 days if turnover exceeds £85,000 in the previous 12 months, similarly if turnover’s expected to exceed £85,000 in the following 30 days, the business must notify HMRC within 30 days of the date the threshold is expected to be exceeded.
Top limited company advantages
There can be tax benefits
A limited company route is more tax-efficient from a personal tax point of view than operating as a sole trader. As a limited company director, you will typically take a small salary (with little tax liability) and the remainder of your income in the form of dividends (which are free from National Insurance contributions). Dividend tax rates are significantly lower than standard personal tax rates.
Your company will be required to pay corporation tax on your companys profits. However, corporation tax rates for small companies are generally lower than most income tax rates.
There are also advantages as limited companies can claim more things as a tax deductible expense than sole traders can. Read more in our dns expense guide for limited companies.
You get protection through limited liability
Limited liability is one of the most significant advantages of setting up a limited company. If your company runs into financial problems, your personal assets will be secure. This is because a limited company is treated as a separate legal entity in its own right and therefore you dont have personal liability. Therefore, there will be no risk of losing your money if the company shuts down. If the company is under loss or shut down, you will be liable for paying only the face value or share you have in the company.
Sole traders, on the other hand, run a much higher risk as they have potentially unlimited personal liability. This means the individual is personally liable for any and all business debts, losses, and liabilities from their personal finances. This is why forming a limited company is far better to limit liability for individuals and separate out your company financial obligations from your personal finances.
The company is a separate legal entity
A registered limited company will be its own distinct legal entity that is entirely separate from you. This means that everything held in the company name from its own business bank account to loans, credit agreements and assets is completely separate from those of the company shareholders. This separate legal identity of the company protects individuals from legal claims that are brought against the company.
Protecting a trading name for a future business
Limited companies are required to have unique names, therefore incorporated businesses are protected from others using their trading name if they have incorporated. Once your name is registered, it becomes protected by UK law and no-one else can use your business name to trade under.
Easier access to finance
If you want to grow your business, fund capital purchases such as buying plant & machinery, you may need to access credit, finance or business loans. Being a limited company will offer you more finance opportunities to raise capital for the business now and in the future. You may get more favourable interest rates and repayment terms as a limited company.
Potential credibility and prestige
There is no doubt that the use of "limited" can add professionalism to a business. When starting a business, it may be seen by your customers as more credible, permanent or reliable and can project a more professional image.
It gives a sense of confidence and incorporating a business as a limited company can open up more business opportunities. It can help greatly to build customer trust and belief in your brand, products or services. There are many large companies that will refuse to do business with you as a sole trader but will be happy to work with you if you run a limited company.
Can a non UK resident start a business in the UK?
The simple answer is yes. Under UK legislation, both a resident of the country and a non-resident can star a business in the UK. The requirements for registering a company are the same for both residents and non-resitdents, however, non-residents will need a UK address.
Whilst it is not a legal requirement for a non-resident of the UK to have a business bank account in the UK, it can be advantageous to do so because you may save costs of moving money between bank accounts etc.
Tax for non-residents of the UK running a UK company can be complex, so you should seek advice from tax professionals such as dns accountants before you set up a UK company.
Other ways to start a business in the UK
Many people who want to run a small business opt to start as a sole trader. Fundamentally, a sole trader is a sole owner of the business and is a self-employed person. Operating as a sole trader is the most convenient way to start a new business in the UK and because of its simplicity. It requires less compliance and statutory rules and doesnt require registration at Companies House. As a sole trader you are personally responsible for all decisions but are also personally liable for any debts etc. as there is no legal separation between you and the business.
Business partnership and Limited Liability Partnership (LLP)
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. In a business partnership, you and your business partner (or partners) personally share responsibility for the business. Partners are jointly and severally liable and are responsible for any losses the business makes.
An LLP is a limited liability partnership where each partner has limited personal liability for debts or claims of the partnership. Partners of an LLP arent held responsible for the acts of other partners.
Having a great business idea and starting a business can be an exciting but also daunting prospect, there are many things to consider and to organise. Whilst starting a business in the UK is not a complex process, it is best to seek professional advice to ensure you do it correctly and follow UK legal obligations.
Many individuals initially start their business as sole traders. However, consider registering as a limited company from the start or once you have established and grow your business.
The advantages of setting up a business and operating a limited company instead of being a sole trader are significant. We recommend you seek professional advice from accountants such as dns accountants for limited company formation, company year-end accounts, self-assessment tax returns and tax planning etc.
For help and advice on starting a business and setting up a limited company in the UK, contact our team.
Any questions? Schedule a call with one of our experts.
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