Many individuals initially start a new business venture as sole traders but once they have established and started growing the business, it often makes sense to set up a private limited company as there can be many advantages to limited companies over being a sole trader.
In this blog we cover the 7 things to consider when setting up a limited company.
Many businesses operate as sole traders in the UK (not registered with UK Companies House), but there are many advantages of setting up a limited company in the UK. These advantages include greater tax efficiency, separate legal entity, limited liability, protected business name along with other advantages.
Read our blog to see more details on the advantages of setting up a limited company in the UK.
All limited companies in the UK have to be registered at HMRC and Companies House. The most common legal structure you can choose is a private company limited by shares. This is suitable for most commercial enterprises; however, it is worth considering the different types of private limited companies available in the UK.
Your decision on which business structure is right for you will be dependent on your own circumstances but some of the things that may influence your decision are:
The different types of limited companies in the UK are:
If you didn’t form a limited company (to protect its name) when you began as a sole trader, then you will need to check with Companies House if the company name is available. Choosing a company name can be hard, especially if you have built up a reputation under a name you used whilst self-employed and that name isn’t available at Companies House. You can use the Companies House availability checker online.
When you’ve found a name that is available, you need to legally form the company with Companies House. You can form your limited company online. Our company formation service will take the hassle away and will register your new limited company with companies house.
If the company you are forming is a private limited company, the company name must end in ‘limited’ or ‘ltd.’ unless it is exempt.
To register your limited company you will need to provide a company address. This address must be a genuine physical address, not simply a PO Box number. If you decide to use your residential address, it is important to remember that the information will be publicly available at Companies House on your company records and this may attract marketing from other companies.
Many people who have businesses based from home or where individuals are based abroad may want to consider a virtual registered limited company address. Here at dns accountants, we offer a registered office address service that provides you with privacy and a prestigious London office address as well as a mail handling service.
The company’s officers comprise of appointed directors and potentially a company secretary. They are the people that have been authorised to represent the company and make decisions as to how it is run.
You need at least one director and at least one shareholder to form a UK limited company. They can be the same person. There is no upper limit to the number of directors or shareholders, you can nominate as many as you wish. However, Directors have to be over 16 and when opening a bank account, it’s normal banking rules for Directors and Shareholders to be over 18.
As a director of a limited company, you have duties and roles must:
You can hire other people to manage some of these things day-to-day (for example, an accountant such as dns accountants) but you’re still legally responsible for your company’s records, accounts and performance.
The company can issue different types of shares. In most cases, especially when the company is first formed, ‘ordinary’ shares will be issued. Ordinary shares provide equal rights and responsibilities to all shareholders.
To register a company limited by shares, you need to issue at least one share. A ‘share’ is a portion or percentage of the company. If a company issues only one share, it will represent 100% of the company. If one person owns that share, they own the whole company. However, if two or more shares are issued, the company is divided, this means that you can have more than one person owning a percentage of the business and these percentages can be different i.e. a 75% and 2% split.
Typically, each share provides the right to a certain percentage of profits, as well as one vote on important business decisions. Share capital is the total amount of money (‘capital’) invested by shareholders (‘members’) in exchange for shares in a company.
Owning more shares and having greater share capital usually provides more financial liability, voting power, control over the business, and a higher profit entitlement.
It may also be worth considering a spouse as either a director or company secretary if you are the only director of the company. This may help if anything happens to you as they will be able to deal with HMRC and Companies House in your absence. The appointment of a company secretary is optional for all private limited companies incorporated in the UK. This provision can be added or removed from the articles at any time by the shareholders.
Be cautious at this stage who becomes directors and shareholders in your company and any future issues that may occur.
A SIC code is a five-digit code used to classify your business activities. Standard Industrial Classification (SIC) codes are essential to get right while establishing your limited company or potentially diversifying your business.
To select a SIC code you need to pick from the list of SIC codes at Companies House and choose the one that most identifies with your company’s business activities. In most cases you will only need to select one code. However, if your company is involved in several business activities, you can opt to choose multiple codes.
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.
When you register your company you need:
If you register your company online, you don’t need to write your own memorandum of association. It will be created automatically as part of your registration.
You can either:
Limited companies must keep a number of records, including financial and accounting records, to comply with the strict record-keeping, accounting, and reporting requirements needed by Companies House and HMRC.
When setting up a limited company you should keep copies of its certificate of incorporation, the memorandum and articles of association, and all share certificates (if applicable).
Ongoing, a private limited company must keep the following records, where applicable:
Accounting records are also crucial to running a limited company as follows:
If a company is VAT registered, it must also keep and retain business and VAT records to account for all VAT transactions and to complete VAT returns.
Companies that are registered as employers must keep PAYE records to work out the right amount of PAYE and National Insurance Contributions to pay, complete annual PAYE returns, and show that employees are receiving the statutory pay they are entitled to.
Limited companies must keep records for six years from the end of the last company financial year they relate to.
Before launching, you should consider the advantages and disadvantages of setting up a limited company.
The advantages of setting up a limited company are:
The disadvantages to forming a limited company can be:
Limited company registration and set up can offer many benefits over being a sole trader, including being more tax efficient. Being a sole trader can be easier but setting up a private limited company is not a complex process, but certain rules must be followed.
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 setting up a limited company in the UK, contact our team and book a call today.
Any questions? Schedule a call with one of our experts.
Sumit Agarwal Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.
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