Choosing how to structure your new business and ensuring the company formation process runs smoothly is crucial to getting your venture off the ground and running effectively. If you’ve never formed a limited company before or are forming multiple limited companies simultaneously, the process can be daunting. Today we will explain how the company formation process works, the steps involved and when it is beneficial to take advantage of company formation services.
What Is A Limited Company?
A limited company is a general term for an incorporation where the company’s shareholders’ liability is limited. The legal structure of a limited company means that the company has a separate legal identity from that of its directors or shareholders, unlike a sole trader, whose personal and business identities are considered by Companies House and HMRC to be the same entity. In a limited company, the owner’s assets, income and debts are distinctly separate from the companies. Because of this separation, the owner’s potential losses are limited to the amount they have invested in the company and cannot extend into personal assets and income.
Under the umbrella term ‘limited company’, several variations exist, each with its unique abbreviation, which will appear in the company name. These include:
- Private Limited Company – LTD
- Public Limited Company – PLC
- Limited Liability Company – LLC
- Community Interest Company – CIC
If you’re unsure which type of limited company is right for your business, speak to the limited company formation experts at Company Registrations Online.
How Limited Companies Work
As discussed, the assets and debts of a limited company are separate from the personal assets and debts of the directors and shareholders. This protects people’s personal assets from being seized by creditors should the company experience financial distress.
Ownership of a limited company is easily transferable from one person to another. Unlike a public company, in which anyone can purchase shares, membership in a limited company is determined and regulated by the company’s own rules.
The Benefits of A Limited Company
The key benefit of forming a limited company is the distinct differentiation between the companies assets and the shareholders’ personal assets through limited liability. Any investor can only ever lose as much as they have put into the business, making limited companies an attractive option for potential investors as their potential losses are, to a point, limited. On top of this, there are several other benefits to forming a limited company.
Minimising Personal Liability
Also known as the ‘corporate veil’, forming a limited company ensures that you are considered a separate legal entity; your company becomes a legal ‘person’ in its own right. This offers a certain level of personal financial protection and legal protection in the event that someone claims your company. Shareholders have no legal obligation to pay more than the nominal value of shares they hold. If your company becomes insolvent and unable to pay creditors, shareholders will only be required to contribute the nominal value of unpaid shares, with personal assets protected.
This is particularly important for fledgling businesses. Those who choose to operate as limited companies rather than sole traders are often perceived as more legitimate since limited companies are more strictly regulated. Limited companies have complex accounting and reporting responsibilities, and their company details and accounts are published as part of public records that can be inspected by other businesses and members of the public through limited company searches.
Of course, whether your company is more credible than a sole trader will depend entirely on how you run your business, but forming a limited company will certainly make it easier to:
- Attract clients and investors
- Access bank loans
- Expand into different locations and markets
- Grow brand identity
- Ensure your business is on par with similar, competing companies in the industry
Protecting Your Company Name
Since no two companies can have the same company name, by forming a limited company, you can ensure that no one else will be able to register your company name or something remarkably similar. Understanding the difference between a company name and a trading name is important when forming a company.
Limited companies currently pay 19% corporation tax on profits, whereas sole traders pay between 20 – 45%. Being a limited company allows businesses to reinvest surplus cash and defer personal income to avoid being moved into a higher tax bracket.
Disadvantages of Limited Company
As one would expect, there are some disadvantages to forming a limited company. These include:
- Navigating the company formation process and paying the relevant fees. This can get complicated if you are forming multiple companies, but company registration packages are available to help with this.
- Company names are subject to restrictions, which you can find out more about in our article on how to choose a company name.
- Accounting requirements are much more complex for limited companies, and in most circumstances, it is advisable to appoint an accountant to handle tax affairs.
- Limited Companies must conform to strict record-keeping requirements and delivery a yearly Company Tax Return and annual accounts to HRMC and Companies House, respectively.
- Companies House must be immediately notified if changes are made to company details, and company registers and records must be well maintained and made available for public inspection.
Most would agree that these disadvantages are heavily outweighed by the many advantages of forming a limited company and would consider these sacrifices more than worthwhile for the enhanced professional image, liability and financial personal protect and tax perks that come with operating as a limited company.
Public and Private Limited Companies
When incorporating your new company with Companies House, either yourself or through an agent who specialises in company formation services, you will have to decide whether you are forming a private or public limited company. It’s important to understand the difference between the two types of companies. In summary:
Private Limited Companies (Ltd)
- No minimum share capital is required to set up a private limited company
- Cannot trade on the stock market
- Can only sell or transfer shares privately
- Must have one individual who serves as a director, and this person can also be the sole shareholder
- Do not require a company secretary
- Can start trading immediately after incorporation
- Does not need to hold an annual general meeting (AGM)
- Must display ‘ltd’ or ‘limited’ after their registered company name
Public Limited Companies (PLC)
- Must have a minimum of £50,000 in share capital
- Can sell shares on the stock market
- Must have at least two individual directors
- Must have a company secretary, who is not the same person as any of the directors
- Must wait for a trading certificate to be issued before they can start trading
- Must hold an annual general meeting (AGM)
- Must display ‘PLC’ after their registered company name
The Costs of Setting Up a Limited Company
There are small monetary costs involved in setting up a limited company, depending on how you choose to submit your application. For example, a standard direct online submission direct to Companies House will cost £12, a postal application will cost £40, and for a same-day incorporation, you will be charged £100.
These numbers seem small and inconsequential, but there are other, less tangible costs associated with forming a limited company that it helps to be aware of.
Regardless of which route you choose, digital or postal, Companies House will require you to complete paperwork ahead of your company formation. You may want to hire an accountant or a company registrations specialist, to ensure the forms are correctly filled in, and there are no hold-ups with your incorporation.
Day-to-Day Accurate Record-keeping
To ensure you comply with Companies House regulations for limited companies, you will need to keep and submit the accurate records they require each year. There are ongoing legal and administrative responsibilities that someone will need to take charge of, which will cost time and money. You may want to consider outsourcing to an agent that specialises in company secretarial services.
Forming a limited company means making information about your company, directors, and earnings a matter of public record that anyone can view online through Companies House. Whilst this isn’t a financial cost, and if you’re running a legitimate company, you should have nothing to be worried about, it is something to bear in mind.
Forming Your Limited Company
Now you have a thorough understanding of how limited companies work, you’re ready to start forming your company. Make sure to have everything in place before you begin your application or arrange with an agent to form the company on your behalf.
Choosing a Company Name
Choosing a name for your company is one of the first steps and it can be both fun and incredibly frustrating. Like a web address or an email, your company name needs to be unique and not already in use, including names that are remarkably similar to another company’s where the only difference is punctuation or special characters.
You can theoretically pick any name for your business, but it must end with either Limited or Ltd if you’re forming a private limited company or PLC for a public limited company. You should also be aware of sensitive words or expressions that imply national or international pre-eminence or imply specific functions (such as chartered, trust or association with the royal family or government bodies). These are prohibited unless your company functions explicitly as one of these kinds of businesses.
At Company Registrations Online, you can use our search tool on our company formation services page to determine if your chosen name is appropriate and available. You can also view our support and information guides for a comparehensive list of prohibited words and phrases.
Registering an Address
Your company needs an address where official post can be sent; this has been a legal requirement since 2006. If your company operates entirely online and does not have a physical business premises, you can use your residential address. However, this address will be legally required to appear on all client correspondence, and you may not want to publish your home address. So an alternative is to use a third-party service for your official business address, such as your accountant’s address, a registered office service or a PO box.
Your registered address needs to be in the corresponding territory to your company. So a company in England must be registered to an English address and a Welsh company to a Welsh address, for example.
Choosing Directors and a Company Secretary
As discussed earlier, if you’re setting up a private limited company, you need to appoint at least one director and two for public limited companies. A secretary will also need to be nominated for PLCs, and it is optional for private.
A director will follow the company’s rules, keep company records, report changes, file the accounts and pay corporation tax. You may hire people to manage some of these day-to-day runnings of operations, such as an accountant. However, the director will still be legally responsible for the records, accounts, and company performance. The company must also have at least one shareholder, but this can also be the director.
Registering Your Limited Company
Once you have all of the above in place, you must register your business with Companies House, which involves completing a series of documents. You will need your chosen company name and the UK address as its registered office. Remember, this address will be made public, and all official correspondence from Companies House and HMRC will be sent to this address. In addition, you will need Memorandum of Association documents, including the names of company officers, directors, share capital and how it is divided between shareholders.
If this admin and documentation gathering sounds daunting or too time-consuming, there is another option. You can use a Company Formation agent to take care of it for you. A company like Company Registrations Online can register your business for you, handling all the paperwork and submitting the documentation to Companies House in complete compliance with the laws and legal regulations.
Choose CRO for Company Registrations
At CRO, our company formation services ensure that your new business is incorporated correctly. You can use our search tool to find out if your chosen business name is available, and then all you need is your registered office address, director and shareholder information. Then we can complete your business registration in no time at all.
We have many limited company formation packages available to simplify the process. For example, we offer quick and easy email formation, professionally printed formation, or when you choose our all-inclusive service, you’ll get a complete business support package including 12 months of our company secretarial services and a free accountancy consultation. Contact us today to see how we can help you with company formation and beyond.