This guide will tell you everything you need to know about starting a limited company and help you to understand some of the differences limited companies have from sole traders.
With a limited company set up, you get to define your brand, own everything you do, run your business in the most tax-efficient way, and pitch for work you wouldn’t be able to get as a sole trader.
If you are looking to set up a limited company for the first time or moving from a sole trader but don’t know where to start? Our step-by-step guide explains the process, from choosing a name to preparing your documents and registering your company.
What is a limited company?
A Limited Company is a type of business structure that has its own legal identity, in England and Wales Companies House in Cardiff will issue its own company number.
If you wish to form a limited company in Scotland Companies House Edinburgh will be the register. Northern Irish company, which is incorporated at Companies House Belfast and has a registered office in Northern Ireland. Limited companies are a company ‘limited by shares’ or ‘limited by guarantee’.
Why set up a limited company?
Registering and running a limited company involves more paperwork and accounting than a sole trader business or partnership, but this is offset with extra protections in terms of financial liabilities.
A limited company’s liability is just that: limited. Deemed to be its own legal entity, it can own property and assets, incur debts, sue and be sued but its finances are completely separate from the personal finances of its owners. This means that should the business fail, neither you nor the other owners can be held responsible for any of its debts. Unlike sole traders or business partnerships, a limited company is a good way to run a business without any risk to personal wealth or assets.
Ownership of a limited company is divided up into equal shares which are then allocated to each shareholder. A limited company can be set up by a single individual who will be the sole shareholder and company director, or by multiple shareholders.
Advantages of forming a limited company include:
- Liabilities such as debts or legal action are limited to the company. You are protected from going personally bankrupt in the event the business fails, apart from in some rare circumstances.
- If you plan to employ staff, it’s better to form a limited company and pay salaries via the Pay As You Earn (PAYE) scheme.
- Corporation tax on profits is lower than the higher rates of income tax that a sole trader will pay.
- As its own legal entity, it’s easier to sell the business later or to sell shares in the business to raise capital.
- A limited company is perceived as a bigger, more professional organisation, which is important if your clients are primarily other businesses or government organisations.
How to set up a limited company
In order to set up a limited company, you’ll need to complete the following steps:
- Name your business: When picking a name for your business, be sure to follow the conditions of Companies House so that your business’ name follows the rules.
- Choose your company directors: All limited companies must have an appointed director. It is not required that you have a secretary, though you can appoint one if you wish to do so.
- Assign your shareholders: A limited company is required to have at least one shareholder. Be aware that a director can also be classed as a shareholder. People with significant control is defined by anyone who has voting rights or owns over 25% of the company’s shares.
- Keep your records: These include detailed records about the company itself, and accounting and financial records.
- Register your new company through Companies House: When doing this you will be required to provide a registered office address. You will also be ordered to provide a SIC code that identifies the type of business you wish to run.
Benefits of setting up a limited company
- separate legal identity – this means the company is liable when things go wrong, not you personally. You’ll only lose what you put into the business
- more professional – some businesses might be seen as more professional by others in their industry when they operate as a limited company – it can make it easier to secure suppliers, investment, and eventually sell the business
- tax-efficiency – you pay Corporation Tax through your business, and you pay yourself in salary and dividends. This may turn out to be more tax-efficient than setting up as a sole trader
Register a limited company yourself
- Register your company with Companies House. It takes 24 hours to register and costs £12 to submit your registration online.
- You’ll need to have chosen a company name and have a UK address as its registered office. This address will be made public and is used by Companies House and HMRC to send official notices to the company. It should also appear on all company documentation such as invoices.
- You’ll need to submit Memorandum of Association documents online including the names of the company officers, directors and people with significant control over the company; the amount of share capital and how this is divided between shareholders; and the trading activities of the company, often referred to as the SIC Code. You can find the appropriate SIC Code from Companies House.
- Download templates for these documents from the Companies House starting a company section.
Using a company formation agent
- There are lots of company formation agents to choose from or you can use a solicitor to register your business. These options cost more but they are often quicker and a specialist will be able to guide you through the information needed for registering the limited company.
- You can search for company formation agents using the Companies House Company Formation Agents directory which lists the web address and phone numbers of recognised formation agents.
- Use Google to search for the agent online, including reviews from previous customers, before picking the one you’ll use.
- The company formation agent will handle all the paperwork and submit the documents to Companies House and it can take as little as three hours.
- The agent will be able to offer other services including the use of a registered office, scanning services for mail received and online portals for managing the administration of your business details.
The differences between a limited company and a sole trader
You shouldn’t confuse limited companies with sole traders as there are a few notable differences between the two. The key opposing fact is that a sole trader consists of a single individual whom is personally liable for the business. Whereas, a limited company is its own entity and can have multiple owners, allowing it to spread out the liability across a variety of people.
The advantages and disadvantages of owning a limited company
Here we’ll quickly run you through some of the key advantages and disadvantages of being the owner of a limited company.
There are many upsides of owning your own limited company, so here’s just a few examples of what draws so many people to them.
The limited liability that comes along with owning a limited company is what attracts so many people to starting their own venture. Having limited liability allows your personal assets to be protected, even if your business falls into debt. This means if your business starts to owe a large amount of debt, you won’t have to hand over your house or car, etc.
Limited liability also allows business owners to choose to use their personal assets to pay off debts should they wish to do so. Therefore, if the situation arises and you need to use personal assets, you’ll be able to make that choice for yourself without it being forced upon you.
Better tax efficiency
The limited business model is very popular right now, partly because of the fact that they are extremely tax-efficient. Of course, limited companies still pay taxes, but their rates can have a much greater level of flexibility. Limited businesses will normally take the maximum amount of profit that hasn’t been taxed.
Treated with professionalism
The way that limited companies are treated in comparison to the likes of sole traders is often with a much greater amount of professionalism. As you are registered as part of Companies House, being the owner of a limited business model can look more prestigious to others in certain sectors and industries.
Also, as a limited company, your business name is in fact protected by the law. No other business can name itself what your company is called, so you instantly have a sense of uniqueness and individuality that allows you to begin growing your brand and business name.
Unfortunately, there’s a downside to everything, so we’ll now take you through some of the disadvantages of owning a small business via a limited company.
Things can get complicated
Setting up and running a limited company can be quite a confusing scenario for new business owners, as it has a more complex business configuration compared to sole traders.
When compared with sole traders, it takes more steps to set up and requires registration with Companies Houses, which costs a small fee, requiring much more administration.
Extra costs come into effect
More accountancy and administration work comes packed with a more complicated process. This sort of work will most likely be outsourced to ensure that it adheres to rules and regulations. Though, this could end up costing you more funds, as administration will likely result in the company having to pay fees to accountants or legal consultants.
Lack of privacy
Your limited company will have to be registered with Companies House, which is accessible by anyone through the Companies House database, which is public. This database includes many details on all companies that are listed within it, such as company accounts, personal details and company structure, i.e. directors, shareholders and persons of significant control.
You don’t have total control
If your limited company has other directors or other shareholders, you will have to accommodate their views and opinions during decision-making processes. The more significant share in the company that an individual has, the more influence they can dictate. If they have a more substantial share than you, they have greater ownership.
If you are the sole shareholder, this means that you own 100% of the company. Nevertheless, countless limited companies have multiple shareholders to aid in securing funding and to split the workload. So, as your company begins to expand, bringing on an additional shareholder may be necessary.
Can a new Ltd Company get Credit?
It is unlikely that a new ltd company will get credit due to not having any history! Normally suppliers, or lenders will ask for directors guarantees. This guarantee will only be crystallised if the ltd company fails to pay the debt. The usually time period for ltd companies to build up a credit status is six months. This will allow suppliers and lenders clear visibility of the companies abilities to make repayments.
To conclude you can see the ups and downs of owning a limited company are vast and widespread. You may have to sacrifice a certain level of control over your venture and things can become complicated, but at the end of the day the risk might just be worth the rewards if you’re willing to fully commit to your new business idea.
How to set up a limited company
To set up a limited company in the UK, you need to apply to companies house with a £12 fee then submit your registration online. If you are unsure on how to do this you can use a company formation agent.
How much to set up a limited company
Companies house charge a £12.00 fee to set up a limited company. Company formation agents charge about £50.00 but the carry out all the legal paper work that is required for the formation.
How long to set up a limited company uk
The time that is required to set up a limited company in the UK from start to finish is about 24 hours.