Setting up and running a Ltd company
For information only. To discuss the best structure for your small business and to fully understand the implications and obligations of your decision to set up a limited company you should seek guidance from a qualified accountant or from your legal adviser.
Most small businesses start life as a sole trader and many continue with that status indefinitely. However there are some circumstances under which you are better advised to set up a limited company. A limited company is an individual legal entity in its own right, with its own assets, liabilities, profits and losses. Unlike a sole trader where everything belongs to the owner of the business, the assets, liabilities profits and losses of a limited company belong to the company and need to be fully and properly recorded, managed and accounted for. Even if you start out as a sole trader you can change from a sole trader to a limited company at any time.
You can set up and register your new limited company directly with Companies House but it is often easier to use one of the many online company formation companies, such as Quick Formations to register your ltd company.
The different types of limited company
Private Limited Company (Ltd)
This is the most typical setup for UK small businesses. This type of company can have any number of shareholders but cannot offer shares to the general public. In the past private limited companies had to have at least one director and one company secretary (who cannot be the same person). From April 2008 the Companies Act 2006 states that there is no need to appoint a company secretary unless one is required. If a company secretary is not required you can set up a private limited company with only one director but that director must be a person (rather than another company) and they must be at least 16 years old.
Public Limited Company (PLC)
A PLC must have an authorised share capital of at least £50,000 and it must have allotted shares to the value of at least £50,000 before it can start business. There are other stipulations on the amount of paid up share capital for PLCs. This type of company is allowed to offer shares to the general public in order to raise funds. It must have at least two shareholders, two directors and one company secretary who is properly qualified to carry out the role.
Community Interest Company (CIC)
A CIC is a Private Limited Company or a Public Limited Company set up for community benefit rather than private advantage. To become a CIC the organisation will need to undergo a "community interest test" and "asset lock", which ensures it really is established for community purposes and the assets and profits are dedicated to these purposes. More information can be found at www.cicregulator.gov.uk/
The advantages of trading as a limited company
- ‘Limited’ means limited liability. This gives the owners of the company (its shareholders) protection if the company fails. They will only be required to pay what they have already paid or agreed to pay towards settling the limited company’s debts, which means their personal possessions and assets are not at risk.
- Limited companies may instil added confidence in suppliers and many large organisations will only do business with limited companies.
- It may be easier to raise finance, either from a financial institution or via the sale of shares.
- The ownership of the company can easily be divided up through the sale of shares.
- There are possible tax advantages. Sole traders are self employed and will be charged personal tax and national insurance contributions on the profit made by the business. A limited company pays corporation tax on its profits.
- However limited companies also need to operate a PAYE system to collect and pay income tax and National Insurance contributions from their employees - including company directors.
You MUST take professional advice from an accountant. Tax is an extremely complicated area and you must take it seriously. Potentially large sums of money are involved and if you owe money to HMRC you need to pay it as soon as it’s due; the interest rates applied on overdue money are extremely high and interest can be added to the amount outstanding on a daily basis.
Forming a limited company
Any individual of any nationality may register a limited company as long as they are not an un-discharged bankrupt, they have not been restrained by court order and they are not subject to UK government restrictions.
All limited company registrations must be submitted to Companies House. To undertake a limited company registration you’ll need:
- A company name. It is possible to register almost any name providing it hasn't been previously registered by another company and it isn’t misleading or offensive. See Choosing a name for your business.
- At least one individual who will serve as a company Director.
- One individual who will act as Company Secretary, if one is required. If you choose not to appoint a named company secretary the functions undertaken by a company secretary still need to be carried out by someone.
- At least one person who is willing to become a Shareholder. They can do this by buying a single £1 share in the company (this person could be the director or the company secretary).
- A registered office address. This is the official address where all statutory documents from Companies House will be sent. This address will appear on the public records and must be a full UK postal address, PO Box numbers will not be accepted.
You can set up and register your new limited company directly with Companies House but it is often easier to use one of the many online company formation companies, such as Quick Formations to register a company. These company formation companies provide standardised limited company documents that will be sufficient for most company formations.
Limited company documentation
The key documents you need to set up a limited company (these will be provided by the company formation company if you use one) are:
- The Certificate of Incorporation. This is the official certificate issued by the registrar on successful incorporation of a limited company. The certificate states your company registration number, company name and date of incorporation.
- The Memorandum of Association, which defines what the company will do, the company name and registered office address, and contains statements referring to limited liability, authorised share capital and share price.
- The Articles of Association, which defines how the shareholders and officers will run the company. The majority of limited companies adopt a legal table commonly referred to as 'Table A'.
Limited company shares explained
The purpose of shares is to:
- Provide a means of capital investment into your company.
- Determine who has overall control of its operation; over 50% fully controls the company.
You can create any number of shares in your company but you do not need to assign all of them. It is usual to create 1000 shares (known as the authorised share capital) with a nominal value of £1. You then assign a proportion of these shares to the shareholders (known as the assigned or issued shares). It is worth noting that although you authorise 1000 shares, if you only issue 1 share the owner of that share becomes 100% shareholder in the business.
Key requirements of running a limited company
The adminstration requirements of a limited company are greater than those of a sole trader and it may be worth considering using an outsourced company secretary service as the official forms required by Companies House are not always easy to locate, or easy to understand.
You are also almost certain to need an accountant to prepare your company accounts and your tax return, and because they are more complex to prepare, their charges are likely to be higher than those incurred for sole trader accounts.
To run a limited company you will need to:
- Keep a full record of income, expenditure, assets, and liabilities. These records must be kept safe as they will assist you in completing the company's annual accounts. You should keep these detailed records for at least seven full tax years.
- Pay income tax and national insurance contributions for any employees. If you are a director and are paying yourself a salary, you are classed as an employee of the company. Be aware that you cannot just take money out of the company like you would do if you were a sole trader - you have to pay yourself via a formal payroll process.
- File annual accounts at Companies House. These are available for the general public to view if they wish. The annual accounts must include a profit and loss account and a balance sheet. If your turnover is in excess of £5.6 million or your balance sheet totals more than £2.8 million you will also need to provide an Auditor’s report from a qualified Auditor.
- Complete an Annual Return each year to confirm basic details relating to the company, such as who the current shareholders and directors are, and confirmation of the registered company address.
- Complete an annual corporation tax return and pay the amount of tax and National Insurance due within nine months of the Company Year End.
Displaying your company name at your business premises
With effect from 1 October 2008 the Companies Act requires companies to display the company's name continuously so that it can easily be seen by the naked eye. This must be at the registered office address (but not necessarily on the outside of the building) and at any location where company records are stored, except for locations that are primarily residential.
Where one location is shared by six companies or more, a company can display its name in a non-continuous way. This could be arranged by using rotating electronic displays but the regulations state that "... where any office, place or location is shared by six or more companies, each company is only required to display its registered name for at least fifteen continuous seconds at least once in every three minutes".
Previous to this the requirement was that the company name be displayed on the outside of every building where company business took place, even if that was at a residential address.
Registering for VAT
Any company, whether limited or not, must register for VAT once its turnover (not profit) exceeds the threshold.
If your turnover is below the threshold you can choose to voluntarily apply for VAT registration if you wish.
For more information on VAT including the current threshold, and the advantages and disadvantages of voluntary VAT registration see our article on VAT basics.
Setting up and running a Ltd company
For information only. To discuss the best structure for your small business and to fully understand the implications and obligations of your decision to set up a limited company you should seek guidance from a qualified accountant or from your legal adviser.
Most small businesses start life as a sole trader and many continue with that status indefinitely. However there are some circumstances under which you are better advised to set up a limited company. A limited company is an individual legal entity in its own right, with its own assets, liabilities, profits and losses. Unlike a sole trader where everything belongs to the owner of the business, the assets, liabilities profits and losses of a limited company belong to the company and need to be fully and properly recorded, managed and accounted for. Even if you start out as a sole trader you can change from a sole trader to a limited company at any time.
You can set up and register your new limited company directly with Companies House but it is often easier to use one of the many online company formation companies, such as Quick Formations to register your ltd company.
The different types of limited company
Private Limited Company (Ltd)
This is the most typical setup for UK small businesses. This type of company can have any number of shareholders but cannot offer shares to the general public. In the past private limited companies had to have at least one director and one company secretary (who cannot be the same person). From April 2008 the Companies Act 2006 states that there is no need to appoint a company secretary unless one is required. If a company secretary is not required you can set up a private limited company with only one director but that director must be a person (rather than another company) and they must be at least 16 years old.
Public Limited Company (PLC)
A PLC must have an authorised share capital of at least £50,000 and it must have allotted shares to the value of at least £50,000 before it can start business. There are other stipulations on the amount of paid up share capital for PLCs. This type of company is allowed to offer shares to the general public in order to raise funds. It must have at least two shareholders, two directors and one company secretary who is properly qualified to carry out the role.
Community Interest Company (CIC)
A CIC is a Private Limited Company or a Public Limited Company set up for community benefit rather than private advantage. To become a CIC the organisation will need to undergo a "community interest test" and "asset lock", which ensures it really is established for community purposes and the assets and profits are dedicated to these purposes. More information can be found at www.cicregulator.gov.uk/
The advantages of trading as a limited company
- ‘Limited’ means limited liability. This gives the owners of the company (its shareholders) protection if the company fails. They will only be required to pay what they have already paid or agreed to pay towards settling the limited company’s debts, which means their personal possessions and assets are not at risk.
- Limited companies may instil added confidence in suppliers and many large organisations will only do business with limited companies.
- It may be easier to raise finance, either from a financial institution or via the sale of shares.
- The ownership of the company can easily be divided up through the sale of shares.
- There are possible tax advantages. Sole traders are self employed and will be charged personal tax and national insurance contributions on the profit made by the business. A limited company pays corporation tax on its profits.
- However limited companies also need to operate a PAYE system to collect and pay income tax and National Insurance contributions from their employees - including company directors.
You MUST take professional advice from an accountant. Tax is an extremely complicated area and you must take it seriously. Potentially large sums of money are involved and if you owe money to HMRC you need to pay it as soon as it’s due; the interest rates applied on overdue money are extremely high and interest can be added to the amount outstanding on a daily basis.
Forming a limited company
Any individual of any nationality may register a limited company as long as they are not an un-discharged bankrupt, they have not been restrained by court order and they are not subject to UK government restrictions.
All limited company registrations must be submitted to Companies House. To undertake a limited company registration you’ll need:
- A company name. It is possible to register almost any name providing it hasn't been previously registered by another company and it isn’t misleading or offensive. See Choosing a name for your business.
- At least one individual who will serve as a company Director.
- One individual who will act as Company Secretary, if one is required. If you choose not to appoint a named company secretary the functions undertaken by a company secretary still need to be carried out by someone.
- At least one person who is willing to become a Shareholder. They can do this by buying a single £1 share in the company (this person could be the director or the company secretary).
- A registered office address. This is the official address where all statutory documents from Companies House will be sent. This address will appear on the public records and must be a full UK postal address, PO Box numbers will not be accepted.
You can set up and register your new limited company directly with Companies House but it is often easier to use one of the many online company formation companies, such as Quick Formations to register a company. These company formation companies provide standardised limited company documents that will be sufficient for most company formations.
Limited company documentation
The key documents you need to set up a limited company (these will be provided by the company formation company if you use one) are:
- The Certificate of Incorporation. This is the official certificate issued by the registrar on successful incorporation of a limited company. The certificate states your company registration number, company name and date of incorporation.
- The Memorandum of Association, which defines what the company will do, the company name and registered office address, and contains statements referring to limited liability, authorised share capital and share price.
- The Articles of Association, which defines how the shareholders and officers will run the company. The majority of limited companies adopt a legal table commonly referred to as 'Table A'.
Limited company shares explained
The purpose of shares is to:
- Provide a means of capital investment into your company.
- Determine who has overall control of its operation; over 50% fully controls the company.
You can create any number of shares in your company but you do not need to assign all of them. It is usual to create 1000 shares (known as the authorised share capital) with a nominal value of £1. You then assign a proportion of these shares to the shareholders (known as the assigned or issued shares). It is worth noting that although you authorise 1000 shares, if you only issue 1 share the owner of that share becomes 100% shareholder in the business.
Key requirements of running a limited company
The adminstration requirements of a limited company are greater than those of a sole trader and it may be worth considering using an outsourced company secretary service as the official forms required by Companies House are not always easy to locate, or easy to understand.
You are also almost certain to need an accountant to prepare your company accounts and your tax return, and because they are more complex to prepare, their charges are likely to be higher than those incurred for sole trader accounts.
To run a limited company you will need to:
- Keep a full record of income, expenditure, assets, and liabilities. These records must be kept safe as they will assist you in completing the company's annual accounts. You should keep these detailed records for at least seven full tax years.
- Pay income tax and national insurance contributions for any employees. If you are a director and are paying yourself a salary, you are classed as an employee of the company. Be aware that you cannot just take money out of the company like you would do if you were a sole trader - you have to pay yourself via a formal payroll process.
- File annual accounts at Companies House. These are available for the general public to view if they wish. The annual accounts must include a profit and loss account and a balance sheet. If your turnover is in excess of £5.6 million or your balance sheet totals more than £2.8 million you will also need to provide an Auditor’s report from a qualified Auditor.
- Complete an Annual Return each year to confirm basic details relating to the company, such as who the current shareholders and directors are, and confirmation of the registered company address.
- Complete an annual corporation tax return and pay the amount of tax and National Insurance due within nine months of the Company Year End.
Displaying your company name at your business premises
With effect from 1 October 2008 the Companies Act requires companies to display the company's name continuously so that it can easily be seen by the naked eye. This must be at the registered office address (but not necessarily on the outside of the building) and at any location where company records are stored, except for locations that are primarily residential.
Where one location is shared by six companies or more, a company can display its name in a non-continuous way. This could be arranged by using rotating electronic displays but the regulations state that "... where any office, place or location is shared by six or more companies, each company is only required to display its registered name for at least fifteen continuous seconds at least once in every three minutes".
Previous to this the requirement was that the company name be displayed on the outside of every building where company business took place, even if that was at a residential address.
Registering for VAT
Any company, whether limited or not, must register for VAT once its turnover (not profit) exceeds the threshold.
If your turnover is below the threshold you can choose to voluntarily apply for VAT registration if you wish.
For more information on VAT including the current threshold, and the advantages and disadvantages of voluntary VAT registration see our article on VAT basics.