Limited Company Formation Guidance

If you're ready to start a new business, then setting up a limited company is straightforward and has advantages as opposed to being a sole trader.

General business guidance for starting a new business is to obtain company registration as a limited liability company. But whatever you choose, you should seek professional advice either from a company formation agent or your accountant.

Limited Liability Company Advantages

Setting up a limited liability company in the UK has many advantages over being a sole trader as a one-man band self-employed person. It does present different challenges from a time and paperwork viewpoint as well as legal issues once someone is a named director.

It's The Company That Has Limited Liability - Not You

One of the main reasons people set up companies is because of the limited liability associated with the formation. This term means any obligations the company has, are in the name of the company itself, and neither the shareholders nor the director's assets can be touched. This arrangement doesn't mean the company can be reckless in its trading and directors also have responsibilities.

Directors Versus Individuals

The dealings between the company and directors are effectively at arm's length as the company is the trading entity. If you're a one-person outfit, like a contractor for example, who sets up a company, then all company trading is in the company name. You, as the director and most probably the sole shareholder, deal with the company. The company is not you.

Company Profits

All profits made and all debts incurred through trading belong to the company and no one else. The profits usually get distributed through dividends. The company will have employees and may pay them a salary in the standard way. The company will pay taxes on the profits in the form of corporation tax which is currently at 19% for small Ltd. companies.

PLC or Private

There are two types of limited companies in the UK. A Public Limited Company or PLC that trades on the London Stock Exchange, or a private limited company that does not publically trade their shares.

Limited Liability Company Checklist

If you're thinking of registering a new private company in the UK then the following applies by UK law mostly under the Companies Act 2006.

  • Although there must be at least one shareholder, the shares cannot be offered to the public if it's a private limited company.
  • The company may have a company secretary, but this is not a requirement under amendments to the companies act 2006 which are in force from Oct 1st, 2009.
  • Directors of the company must be aged 16 or over.
  • Private limited companies must file accounts each year at Companies House before nine months after their year-end.
  • If you don't file your accounts in time, then you receive a penalty of up to £1,500.
  • You do not need to hold an annual general meeting.
  • You need to complete an annual return of your company information such as address, directors and shareholders each year.
  • Shareholders can be paid dividends from the company.

All businesses that have a turnover in excess of a certain threshold have to register for VAT.

Registering a New Limited Company

A brand new company can be registered online in the UK either at Companies House or via many of the online registration agents for a nominal fee usually around £30. Many have what they call "off the shelf companies". These have already been registered and are effectively trading.

If you don't have a name in mind, you can pick one of these existing companies and have the shareholding transferred over to you. This process can take a matter of hours. If you have a specific name to register, the registration process is again instant but may take a few days to complete.

Once completed you'll receive some forms about your company which you would have completed yourself or have your agent complete them and need to understand and keep safe.

  • Certificate of Incorporation of a Private Limited Company with your unique company number once the company exists.
  • Memorandum of Association that has the company names and location.
  • Articles of Association which now has the company's objectives and liabilities (which were previously in the Memorandum).
  • Form 12 states your company complies with the Companies Act 2006.
  • Form 10 lists the shareholders and shareholding in the company, together with directors and all names and addresses.

Once you've finished the formalities of setting up a limited liability company, then the company is registered and can start trading.