How to launch a limited company

Deciding on the right structure for a start-up business can be a difficult process. There are well-versed arguments around opting for either a limited company set-up or a limited liability partnership (LLP), particularly in the professional services sector, and factors such as tax liabilities, allocating profits, and restructuring or exiting the business at a later date must all be taken into account.

Similar discussions also exist in the rapidly growing one-person business sector, although for many the debate here is around whether operating as a sole trader or a limited company is the most efficient route. With some commentators suggesting that freelancers and contractors will become even more important to the UK economy post-Brexit, those looking to take their own knowledge and skills into the marketplace on a self-employed basis will be weighing up the best option for them.

The arguments for opting for a limited structure include added credibility, the ability to compete for more contacts, more opportunities to raise finance, and the added attraction of greater distance and protection between your personal life and assets, and your business venture.

However, concerns over the level of formalities needed to launch a limited company, and fears over the costs associated with any complexities, have acted as a deterrent for some. So just how easy – or difficult – is it to become ‘incorporated’ and set up your own limited company? Below are some of the key issues you will need to consider.

What is a limited company, and what type would be best for you?

It’s important to understand that a limited company is a standalone legal entity, one which can make or lose money, has to pay its own taxes, and which has to have its own trading accounts. All of which can be achieved quite simply – but some people fall into the trap of believing they and their company are one and the same thing.

If you decide that a limited company is the way forward, the main issue to consider is whether the best company structure would be as a private or public company limited by shares, or as a private company limited by guarantee. It’s a decision that will need to take into account the purpose of the company and its capital requirements, so it’s worth getting specialist advice, even at this early stage.

What will I need to do for incorporation?

You will need to decide on a name for your company, where it is going to based (the registered office), and who is going to be formally involved. Private companies must appoint at least one director, although they no longer have to appoint a company secretary (unless the company’s articles of association state differently).

A public company must have at least two directors and one formally qualified secretary. Directors and company officers have very specific responsibilities under the law, and you can find out more about these at the Companies House website.

Once you’ve decided on the name and make up of the company, you will need to register it, and there are a number of official forms you will need to complete, including:

• form IN01 (‘Application to register a company), which details the company name and registered office, and the names and addresses of all company directors and officers (who also have to sign the application)
• the company’s Memorandum of Association – a clear statement of what your company does and how you intend to run it
• the Articles of Association, which details the duties and responsibilities of directors and officers, as well as the relevant rights and restrictions on shares issued.

These completed forms, along with a registration fee, need to be submitted to Companies House. The documents are checked – including verification that prospective officers are not on the Companies House Disqualified Directors’ Register. If documents satisfy the various tests and checks, the company is formed, and you will then receive a certificate of incorporation.

It’s possible to complete and submit these forms yourself online; however, there will inevitably be tax and accounting implications arising from the structure of the company, and consideration about ownership and running of the company relating to distribution of shares – particularly when a number of directors and shareholders are involved. So there are significant benefits from working with a specialist adviser, such as an accountant or formation agent, throughout this process.

What do I do after incorporation?

If you’ve been working with a specialist adviser, once the incorporation documents are received they will usually provide you with a ‘formation pack’, which is likely to include the relevant documents together with suggested minutes for the directors’ meeting, a Statutory Book (a combined register and minute book), and some blank share certificates.

One of the first activities after incorporation is to hold an initial directors meeting, where you will need to deal with a number of formal issues. These may include:

• the appointment if necessary of a chairperson, managing director and any additional directors, and approval of any employment contracts
• the appointment if necessary of auditors
• the issue of share certificates and any distribution of further shares
• the approval of banking arrangements and authorised signatories
• adopting an accounting reference date.

That first directors meeting is also the opportunity to convene a general meeting, which may be required if, for example, you need to approve any directors’ service contracts for terms exceeding five years.

After these first board and general meetings, you will need to return a number of forms to the Registrar of Companies, such as Form SH01 (return of allotment of shares), Form AA01 (change of accounting reference date), and a copy of any new or altered Memorandum of Association or Articles of Association.

At this point it’s also important to register for VAT (if required), and to make sure you notify HMRC within three months of starting trading or receiving interest on a bank account, or other taxable income – if you’re late you are likely to face a fine.

What next?

A company may not be the most appropriate structure for your business; but if you think it is, or could be, then don’t be put off by the prospect of completing formalities and additional paperwork. The time and effort taken to set up the company could be far outweighed by the resulting tax benefits in terms of tax allocation and business development.

Whatever you decide, it’s important to seek sound, expert advice as early as possible. This post was written by Tony Pennison of the Price Bailey Business team. For further help, you can contact him using the form below.