Setting up as a limited company is more complex than setting up as a sole trader. There’s more to do and it takes a bit longer. However, setting up as a limited company can benefit you in many ways, especially if you want to grow and expand your business. Here we’ll go through what you need to know before setting one up.
Public limited company vs private limited company
First you need to decide whether you want to be a public limited company (PLC) or a private limited company (LTD). The main difference between the two is that PLCs are more formal and require more share capital, directors and shareholders. When starting out most small business owners choose the private limited company structure (LTD).
Choosing a limited company name
You also need to choose a name for your limited company. Your company name should be unique and not too similar to already existing companies. You can use the Companies House online name checker to see if your preferred company name is available. Any paperwork can have your trading name emblazoned in large letters but must also show your limited company name, number and registered office address. If your business needs a website, remember to make sure that the domain is available.
Register an address for your limited company
You will need a registered office address. This may be your trading address or the home of one of the founding directors. If you prefer to keep your home address anonymous then some virtual office facilities will allow you to use their address for this purpose. Alternatively, you may be able to use your accountant’s or solicitor’s address for a fee. Whatever the company address, you must ensure that you can receive your post promptly, as this is where legal papers can be served.
Forming a limited company
You can register your company via the Companies House website using the default Articles of Incorporation provided during the process (these are the official documents you need to create a company legally). Whilst this might be acceptable for a ‘one person band’ you may prefer to use a solicitor if there’s more than one director or shareholder.
If there’s more than one director-shareholder you should ideally have a Shareholder’s Agreement drawn up by a solicitor. As a minimum, the Shareholder’s Agreement should specify how you’ll share profits between salary and dividends and what you’ll do if one partner is unable to work or who will acquire shares in the event of death or divorce of one owner.
Do brush up on the legal responsibilities of directors on a regular basis. You’re required to act in the best interests of the company as a whole rather than your personal interest. Find out more about your responsibilities as a limited company director.
What documents do I need to register a limited company?
When you register your limited company with the Companies House you’ll need to provide some documentation to complete the incorporation. These documents need to be handed in before your business can start operating.
- Memorandum of association - this is a signed statement by all the shareholders, agreeing to register a limited company
- Articles of association - these are written rules about running the company, agreed upon by the directors and shareholders.
If you register your company online, your memorandum of association will be created automatically. You can choose to write your own articles of association or you can use standard articles supplied by the Companies House. Find out more about memorandum of association and articles of association.
Limited company tax and PAYE scheme
You’ll automatically be registered to pay Corporation Tax when you register your company online. However, if your company was set up by a third party, such as an agent or software, you’ll have to register for Corporation Tax separately. To avoid penalties, you should register within three months of starting your business.
Corporation Tax returns are usually filed on a yearly basis but if you set up your company mid-month your first accounts for Companies House may be more than 12 months. As tax returns can only be for a maximum of 12 months this will mean that you have to submit two corporation tax returns for the first period. Eg, if you set up your company on 15 June 2020 your first accounts will be for the 12.5 months to 30 June 2021 but you will need to submit two corporation tax returns; one for the year to 14 June 2021 and one for the short period to 30 June 2021. Subsequent accounts will be for the 12 months to 30 June each year
Alternatively, you can change your company’s year end. This may be 31 March to tie in with your personal tax year, or 31 December to follow the calendar year, or you may prefer to make it 12 months from now
If the director-shareholders are paying themselves a salary then you’ll need to set up a PAYE scheme with HMRC. It may be worth talking to an accountant about how you split profits between salary (for work carried out) and dividends (for the financial risk of investing in the company). It is important to distinguish salary as a payment for services for a director role, versus dividends which is a distribution of profit due to ownership through shares
Find out more about salary and dividends.
Setting up a limited company checklist
- Think of a name for your business and check if it’s free on the Companies House website. If you need a website, do make sure that the domain name is free.
- Register an office address. You must ensure that you can receive your post at this address.
- Register your company via the Companies House website or get a solicitor to facilitate the process.
- Draw up a Shareholder’s Agreement if your company has more than one director or shareholder.
- Make sure your company is registered for Corporation Tax and the employee PAYE scheme, if necessary.
- Check what licenses and insurances you’ll need for your business, if any
- After your company is registered it’s a good idea to open a business bank account.
- Start recording your income and costs for the business. This can be done through the Starling Business Toolkit or any third-party bookkeeping software.
- Open a savings account or use the savings Spaces on your Starling account to set aside money to pay your tax bill.
- Let everybody know that you are open for business. Encourage your friends to support you by sharing on social media, looking out for opportunities for you, and even buying from you themselves at full price (now is not the time for “mates’ rates”).