How to Set Up a Limited Company
Forming and working through a limited company is a smart, tax-efficient and hugely popular way to operate as a freelancer, contractor or small business owner. In fact, at last count, there were over 4 million limited companies registered in the UK, which tells you just how popular this business structure is.
But how do you set up a limited company? From choosing a name to incorporating your business and getting it ready to the point of launch, in this guide we outline a simple five-step process to set up a limited company.
Limited company definition
Before we dive in, let’s quickly define a limited company. By definition, a limited company is a type of business structure that’s legally separate from its owners (shareholders) and managers (directors). Unlike sole trader businesses, limited companies must be incorporated with Companies House, which is a body that keeps a record of all information regarding limited companies. There are more than 4m limited companies in the UK, with many of these one-person businesses formed by freelancers and contractors.
Decide on type of limited company
When setting up a limited company for contracting - or any other business activity for that matter - you’ll first need to decide on the type of limited company you want to form. This tends to be a straight shoot out between a private or public limited company. Most contractors and other start-ups go down the private limited company route, as they are not looking for external investors at that time. Should they want to float their company on the open market and invite external investors, they would need a public limited company instead, and they would need £50,000 share capital from the word go, at least two shareholders, two directors and a qualified company secretary when they are set up.
Name your limited company
Next up, you need to choose a name for your limited company. This must be unique to your business and not already in use by someone else. While this is the exciting part of setting up a limited company, it deserves careful though - this is, after all, your reputation we’re talking about.
Form your limited company
All limited companies need to be incorporated with Companies House, which is the body that keeps a record of all registered companies in the UK. There are a few questions you’ll be expected to answer when completing this process, the most important of which we’ll take a look at now:
- Type of limited company - as touched on earlier, you’ll need to tell Companies House if you intend to open a public or private limited company.
- Registered addresses - Companies House will ask for three addresses - your registered office (where official correspondence is sent), your business address (where banks, clients and suppliers send letters) and finally, your service address (your personal address). If you work from home and don’t mind your home address being on the public register, then you can have the same address for everything.
- Ownership and share allocation - decide who will own the shares of your company. Most freelancers and contractors own 100% of the shares but in some cases, allocate some to their spouse, other employees, or even other investors. As part of the share set-up, Companies House will ask for a share value. In other words, how much is each share worth? Bearing in mind that most companies aren’t worth anything when they are first formed, a simple approach is to set the share value at £1.
- Memorandum and articles of association - as part of setting up a limited company, you’ll need to check and agree to a ‘memorandum of association’ (a legal statement signed by shareholders agreeing to the company formation) and ‘articles of association’ (rules about the running of the company agreed by shareholders, directors and the company secretary). If you set up a limited company online, Companies House will create standard documents for you. However, you’re free to upload your own.
Once you’ve completed all of the above and provided Companies House with other information, such as your National Insurance number and various other personal details, your limited company will be incorporated within 24 hours. At this point, you’ll receive a ‘certificate of incorporation’ confirming that your company legally exists. In doing this, you’ll also have registered your company for Corporation Tax.
All of this can be done on the government website. Alternatively, if you would prefer for an expert to set up your limited company on your behalf, Caroola can help, take a look at our accountancy packages.
Open a business bank account
Because limited companies are separate legal entities from their owners, they need a separate bank account through which they can receive and make payments. So the next step, after having incorporated your limited company, is to open a business bank account.
While this is relatively straightforward, there are several factors to consider before choosing your bank. Make sure that you’re clear on any fees and charges, the level of customer service you should expect and whether you’ll receive interest on any amount kept in your business account.
Registering for tax
Having completed the process of forming a limited company, your next step is to register your business for tax. Corporation Tax is the tax that you pay to the HMRC based on your company profits each year. Once registered you will receive a company UTR (unique tax reference number) which will help HMRC to identify your company tax filing and any tax payments you make. HMRC will confirm your UTR by letter, and also the dates of when your corporation tax will be due.
Unlike Corporation Tax, registering for Value Added Tax (VAT) and Pay As You Earn (PAYE) may not be immediately necessary, so you must understand when they can be of benefit, or when you will have to register, should you reach a certain income threshold, for example. Having a clear idea of your tax responsibilities and that your business is set up correctly from a tax perspective is key, and this is where the expertise of a trusted contractor accountant - such as Caroola - can make all the difference.
To learn more about VAT, how to register and what it entails, take a look at our guide to VAT.
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