Forming a Company in the UK
Forming a company in the UK? Here’s The Startup Story’s guide to some of your most basic questions and misunderstandings…
What is a Sole Trader?
Sole Traders are self-employed persons who trade (buy, sell, consult etc.) in the UK. A sole trader will setup and own their own business, which may or may not employ other people, but they are the only owner. A sole trader also has unlimited liability for any losses (damages, debts etc.) which their business might incur.
For a good article explaining more on the advantages and disadvantages of being a Sole Trader:
Official advice from GOV.UK: on being a Sole Trader
What is a Limited Company?
A limited company is a legal entity, which is registered for trade and recognised by the legal system in the UK. Typically a limited company will have a number of directors, shareholders, employees, and (possibly) a secretary. A limited company is by definition, limited in terms of the amount of money it is ultimately liable for.
Why set up a Limited Company?
Operating a limited company in the UK will likely involve more admin and running costs than for a sole trader, however a sole trader is personally liable for any debts incurred if their business fails. If debts become substantial and a sole trader cannot repay, they risk bankruptcy. In contrast, a limited company offers protection against this.
A limited company in the UK is treated as a separate legal entity, legally responsible for it’s own finances (including debts of course). This keeps the finances of a business separate from those of the owner(s) of a limited company.
Given that a director of a limited company hasn’t traded recklessly or broken any laws (fraud etc.), then their risk of financial loss is limited to the sum of money they have invested in the company. However, it’s worth noting that a director would be liable for any bank loans for the company, against which they provide a personal guarantee.
Potential benefits of forming a Limited Company, versus Sole Trader:
- Limited liability – your own personal finances will be legally separate from those of your company
- Decide your own work–life balance (comes with the territory of being your own boss)
- Potential to take home a greater pay check
- Limited Company status may grant you more borrowing power with banks and lenders
- Limited Company status may open doors and attract bigger business prospects
- Potential to work with more agencies and partner companies (many won’t work with sole traders)
Types of Limited Companies in the UK
- Private limited companies –
can issue shares to multiple shareholders, but those shares cannot be traded publicly (i.e. on the London Stock Exchange for example)
- Public limited companies –
can issue shares and trade these on a public stock exchange
- Limited Partnership –
the liability for any debts is split amongst the partners. Partners can be ‘general’ or ‘limited’ partners. General partners can be liable for all of the partnerships’ debts whereas limited partners are only liable up to the value they initially invested. (GOV.UK official advice on limited partnerships)
- Limited Liability Partnership (LLP) –
all partners are limited partners and not personally liable for any debts the business cannot pay. Their liability only goes as far as the value they initially invested.(GOV.UK official advice on limited partnerships)
- Limited by shares –
the financial liability of the companies shareholders is limited to the value of the shares that they own but haven’t paid for
- Limited by guarantee –
the companies financial liabilities are guaranteed (up to a certain value) by personal guarantees from directors and/or shareholders.
How do I set up a Limited Company in the UK?
Setting up a new company may sound quite daunting, but is actually a relatively simple process. It can be done by yourself, or with the assistance of an accountant or a dedicated company formation agent.
To form (‘incorporate’) a limited company in the UK, you must first register with the Companies House. Companies House is the regulatory body responsible for registering all limited companies in the UK and maintaining a registry of these companies.
As part of the registration, you need to provide some basic information and a number of signatures in the right places. The information required is captured across 3 key documents, all of which must be completed and sent to Companies House.
There is also an admin fee payable to Companies House, required for each company registration (currently £15 if via Companies House direct).
- Memorandum of Association:
details include – the company’s name, registered office and nature of the business (e.g. eCommerce, financial services, consultancy etc.). The ‘registered office’ of a company is its official address – this is where Companies House will send notices, letters, and all other official correspondence.
- Articles of Association:
these set out the rules for the running and regulation of the company, including director’s powers and any shareholder rights etc. Details typically include procedures for what to do if a director leaves (on good terms, bad terms, or through death)
- IN01 form:
this document contains key details of the director(s), the company secretary (if there is one), any shareholders, and structure of share capital (if the company is limited by shares).
Companies House will not provide the Memorandum or Articles of Association; these must be procured via a legal advisor, or a company formation agent. Alternatively, some standard template documents can be found by searching around online.
At the time of formation, private limited companies must appoint at least one director (the director does not necessarily have to be a shareholder in the company). Any appointed director must be at least 16 years old, not disqualified from acting as a limited company director, and not currently bankrupt.
If the structure and management of the company changes at any point during its lifetime – then the directors are responsible for notifying Companies House of any such changes.
Private limited companies do not necessarily have to appoint a company secretary (this was a previous requirement).
A limited company must submit and file accounts with Companies House, by a certain date each year. Failure to do so incurs penalty charges (fines). Also, unless a company is exempt, it must also be audited annually. The company must complete and submit an annual return to HMRC, declaring any taxable income and/or profits, after which Corporation Tax is then payable.
Directors of a limited company are legally regarded as employees of that company and as such are required to pay income tax and class 1 national insurance contributions.
The usual mechanism for delivering profits from a limited company to its shareholders is via dividends.
Companies House’s online incorporation service (limited companies, limited by shares only): GOV.UK: Register a Company Online