In order to be set up as a limited company, a business must register with HMRC and Companies House. Once incorporated, the financial responsibilities for the company are separate to those of the individual(s) who run it. Registration is important for both new business startups and international companies looking to trade in the UK.
LIMITED COMPANY FORMATION: THE BASICS
You need to register with two different government organisations for the formation of your company to be legal:
- Register with Companies House (‘incorporate’) – this is where all the details of your business will be registered, including the company name, share structure and directors.
- Register with HMRC – limited companies are required to pay corporation tax to HMRC. You need to register with the tax office at the earliest opportunity.
REGISTERING WITH COMPANIES HOUSE
You need the following to register your limited company with Companies House:
- Company name
- Business address
- At least one director
- At least one shareholder
- The ‘memorandum of association’, a document that outlines the relationship of the company to its shareholders. It also contains the names of the shareholders and the business’ physical address.
- The ‘statement of capital’ explains the starting share structure of the company. It can change in the future, but at this stage it should clearly show your initial setup.
- The ‘articles of association’ describe how the company will be run. The government’s standard articles must be used if you’re registering online.
CHOOSING A COMPANY NAME
Every new business incorporated in the UK needs to be registered using a unique business name and an address. You can name your business anything you like – within certain limitations. Your business may not use the same name as another, for example, nor can it use expletives. Your business name also cannot be similar to another, e.g. ‘Dinamix’ and ‘Dynamics’ so as to avoid any confusion further down the line.
REGISTERING AN APPROPRIATE ADDRESS
Your business address is the address at which you officially register your business. It does not need to be the address you actually trade at. For example, if you run a home-based business, it is a good idea to keep the business address separate so as to direct all mail there and avoid any potential privacy threats.
In order to avoid registering your limited company with your residential address, you can purchase a registered office address from as little as £15 per month. Your company address will be publicly visible on your Companies House record, so choosing an address in a prestigious business district can positively affect the way your company is viewed by others, too.
Once you have all of this information, you can register your business with Companies House. This can be done online, by post or through an agent. To register online, visit the gov.uk site; this will cost £12 and is usually confirmed within 24 hours.
REGISTERING WITH HMRC
You must provide information to HMRC about your business within 3 months of starting. They will use this information to work out when you will pay corporation tax and set you up with your tax code. You can do this online using this form. When you register, you’ll tel HMRC the date you started to do business, which will be used to calculate tax for your first period.
To complete the form, you’ll need to a unique taxpayer reference (UTR) number. One will be sent to your registered address within a few days of registering your business with Companies House. This means it is essential to ensure you can receive post at your registered address and that that post will be forwarded to you – all of which can be handled by our virtual office address service.
Once your business has been registered, you’ll be told the deadline for your first tax return, which you’ll need to file even if you make a loss or you don’t need to pay any corporation tax.
WHY SET UP A LIMITED COMPANY?
As of Q3 2017, there were over 3.9 million limited companies on the Companies House total register, a number that has risen every year since the register’s inception in 2012. Limited companies are typically set up by new businesses or to those who have previously been trading as a sole trader and want to separate the finances of the business from their personal affairs, usually for the purposes of growing it.
Many other businesses will prefer to work with a limited company rather than a sole trader – a benefit that, for many business owners, outweighs the downsides of stricter regulations and more paperwork.
There are also financial considerations to take into account. While there are more regulations governing how you can withdraw money from a limited company, your personal financial affairs are separate and unaffected by the business’s performance.
Typically, sole traders or entrepreneurs choose to incorporate their limited company when:
- They know that their target client base prefers to work with limited companies
- The business’s income passes the threshold where corporation tax is more economically beneficial than income tax
IS IT MORE BENEFICIAL TO SET UP A LIMITED COMPANY OR STAY AS A SOLE TRADER?
One of the questions most commonly asked by new business owners is whether a limited company or sole trader status is best for them.
Most businesses owners will start as sole traders. This gives you the opportunity to test out your business and start generating interest without the paperwork and regulations often associated with being a limited company.
Being a sole trader also means you retain complete control and responsibility over your business. Though you can employ people to work with you, the bucks stops with you. You will also pay a different form of tax – income tax rather than corporation tax – which can work out to be more economically beneficial for you if your turnover is below a certain threshold.
One of the biggest pitfalls of working as a sole trader is that your business and your individual finances are not separate, meaning your business debt and credit ratings are applicable to you as an individual too.
In contrast, limited company status allows you to separate your personal affairs and can also be seen as a more attractive prospect for clients considering working with you as it suggests a stronger presence and longevity.
Whether you’re looking to set up a limited company now, or if you think you will in the future, it’s worth registering your business with Companies House as soon as you can, which allows you to protect the business name from being taken by someone else.