Set up a limited company: step by step

If you have a business wanting to set up shop in the UK to sell your goods and services, there are many ways you can go about it. You can set up as a sole trader, business partnership, or a limited company.

If you are a freelancer or sole entrepreneur, doing business all by yourself, you may want to set up as a sole trader. It is possible to set up as a limited company even if you are the sole controller of your company, although this is not a wise option if the company is not large enough or with good financial standing. You can start as a sole trader then make a change when the time is right.

If you are in partnership with other people, you need to set up as a business partnership, otherwise, you can set up as a limited company. In this article, we will be elaborating on the limited liability company and how to go about setting up business in the UK.

To start with, what is a limited liability company (LLC)?

A limited company is a company that is limited by shares (private or public) or guarantees, i.e., it is controlled by shareholders or guarantors. The registrar for limited companies in the UK is the Companies House while registration for corporation tax payment is done with the HM Revenue and Customs (HMRC).

Limited companies are common in the UK and other countries with a corporate form of business organisation. They are popular because they provide the limited liability protection of a corporation while allowing the owners (shareholders) to retain the taxation benefits of a partnership or sole proprietorship.

How many types of limited liability companies exist?

There are two types of limited liability company in the UK:

Company limited by shares

When a company is limited by shares, the members or shareholders contribute the initial capital in the form of shares and can receive dividends on their shares monthly or yearly.

Moreover, the company is liable for any debts incurred in the course of its business up to the nominal value of the shares that have been issued. However, the company's creditors cannot go after the personal assets of the shareholders in order to repay the company's debts in the event of its insolvency.

Companies limited by guarantees

A company limited by guarantee has guarantor(s) instead of shareholders. The guarantors may or not contribute a capital share during company formation but the profits made by the company are reinvested into the company and not shared by the guarantors. This is the kind of formation for charities, NGOs, religious or educational organisations, clubs, and sometimes law firms.

A limited company can either be public or private. When it is private, its shares are only contributed by shareholders or investors looking to become a shareholder while the public limited companies have the option of raising funds from the public through IPOs.

How to set up a limited company?

Company registration is also known as company incorporation or formation. You can either register and submit directly online via the Companies House website, print out the form and send it via mail to the address on the form, use an agent, or a third-party website.

If you are registering online, you need to make sure all your documents are in digital format. Agents that help register your company on your behalf offer varying prices, services, and packages.

Registering a company is not so easy because of some laws that must be adhered to, therefore you may want to consider the help of an agent. However, here are a few things to consider and make available before registration, whether you are doing it yourself or not.

• Choose a new and unique name – the name of the company you are choosing must not have been in use, be similar or alike to that of another company, or be an existing trade name; must end with an Ltd.; and must not contain any offensive or sensitive word. 
   
• Verify the name – this can be done on the website of the Companies House. Name search is free. 
   
• Choose the address you want to use – this can be the headquarter office address, the director’s address, or a virtual office address. Using the residential address of one of the directors may not be legally acceptable.
   
• Choose the directors and or the company secretary – having one or more directors is important but a company secretary is optional.
   
• Choose the shareholders or guarantors – shareholders could be one or more and this same person can be a shareholder. So, it is possible to have a company that is run by a single person.
   
• Choose the persons with significant control (PSC) – these are the people with voting rights in the company. The Companies House would like to know about them. 
   
• Prepare your documents of association – these are the statement of organisation of your company, describing how your company would run, i.e., memorandum and articles of association.
   
• Know the records you need to keep – some of these are the minutes of meetings and votes, as well as company and account records. These must be kept for at least 6 years after the end of the last company’s financial year
   
• Register – you should keep your business’ SIC code, company or director’s address, and at least two personal information about your company’s guarantors or shareholders.

Note that registration is not free. Registering by yourself will cost £12 which you can pay via your debit or credit card.

If you are choosing to go through an agent, it could become higher depending on the package you chose. Also, if you would not like to include ‘Limited or Ltd.’ in your company name, you should register by post.

After successful registration, a digital certificate of incorporation will be sent to you via email. You can request hard copies which will be sent to your registered address as well.

You can also voluntarily register for VAT but it is legal to register if your taxable returns annually are more than £85,000. This could be advantageous to your company since it’ll be able to recover some funds via VAT to alleviate the impact of taxes on its finances.

Advantages of setting up as a limited company

Since a limited liability company is separate from its owners…

- Its finances are separate from that of its owners or shareholders. This implies that a limited company will be taxed separately, completely responsible for its profits which are used as working capital after payment of dividends to shareholders and directors, and bears any liability that may ensue. In other words, the shareholders’ or guarantors’ personal assets are protected against any liability.

- With bigger assets, limited liability companies have better access to loans from financiers than sole traders. This is because the company’s assets are worth more and they have more credibility.

- Various sources of capital. A private limited liability company can be taken public through an initial public offering (IPO) and thus become able to access funds from the public. Otherwise, a shareholder can also choose to sell part of his shares if there is an interested investor that can finance the company.

- The company does not have to go under simply because a shareholder sells or transfers his share, or dies.

- Higher tax advantage over sole proprietorship or partnership. Limited Companies generally pay less tax, especially because they would have registered for VAT as a form of a rebate.

Disadvantages of Limited Liability Companies

Despite the number of advantages that can be garnered from transitioning your business to a limited company, there are a few disadvantages:

- Elaborate accounting and tax filing – doing the account of a company may compulsorily require the expertise of an accounting firm (for large companies) or an in-house accountant. The tax filing also became more elaborate since the company would have several inlets and outlets to fund.

- Annual account filing and confirmation statements with Companies House – unlike the sole trader, a limited company’s accounts must be accurately declared with the company registrar every year. The annual accounts filing involves presenting your company’s balanced account records each year to the government while the confirmation statement is simply used to declare that all information presented to the Companies House is accurate. Doing this every year may be tedious.

- Companies’ information available in the public domain – the Companies House is legally required to make all information about the companies registered with it on the public registry, accessible online on their website. Hence, it is easy for competitors to get the financial details without much ado.

- Higher Administrative costs – there will be the need to have executive role directors and their subordinates in limited companies, unlike the sole trader who owns and does his business alone. A limited company thus becomes costlier to run.

- Difficult to transition to a business partnership or sole trading – if there is any reason why the setup as a limited liability company is not working, it is more difficult to make a switch to sole trading to downsize.

To conclude, a company limited by shares is a company where the members or shareholders contribute the initial capital in the form of shares and can receive dividends on their shares monthly or yearly.

The company is liable for any debts incurred in the course of its business up to the nominal value of the shares that have been issued. However, the company's creditors cannot go after the personal assets of the shareholders in order to repay the company's debts in the event of its insolvency.