Becoming a limited company can be a difficult yet developmental change. It’s also common for individuals to have no knowledge of setting one up. What exactly is the process of setting up a limited company, and why do sole traders choose to do this?

The process of starting a limited company

The initial choices

The first thing you need to do when setting up a limited company is to decide on the name and reason for setting it up. You should consider whether or not the various other types of business are more applicable before choosing to start a limited company. 

Is a limited company best?

When deciding if a limited company is best, you should start by ruling out the other options. This is as the benefits of a limited company can often make overlooking the opposition easy. Here is a short list of the other options to make this simple:

• Sole Trader – Sole traders have the benefit of working in their own time, with all earnings going to their accounts. They don’t answer to a board of shareholders and as such, all decisions are theirs to make.
• Business Partnership – A business partnership splits the responsibility for the business between two business partners. This splits responsibility between two individuals without needing to introduce a board of shareholders.
• Social Enterprise – A social enterprise is a business that aims to make a positive social impact. This is done through a strong social or economic mission, and often a majority of the profits are reinvested into achieving it. This type of business benefits from better employee retention, as well as heightened client relations.
• Overseas Company – Overseas companies provide no extra benefits for those that can use them. They are used to establish a UK base for any non-UK business.
• Unincorporated Association – This type of business does not require registration with companies house and costs nothing to set up. Each person in this business is responsible for their individual pieces of debt contracted obligations. If an unincorporated association begins to make a profit, they need to pay corporation tax and file a tax return the same as a limited company.

Picking a name

Names for a limited company must be unique. This means that you must have a name nobody else has and you cannot use a “too like” name. For example, you cannot just change  “easy plumbing” into “EZ plumbing” as companies house will likely contact you in order to change it.

A name cannot be:

• Offensive – This means that profanity or other hateful language is immediately unavailable. 
• “Same as” names – If the only difference is punctuation, common symbols or even meaning, it is known as a “same as” name. For instance, “plumbers are cool” is the same as “plumber’s are cool” or even “plumbers are cool UK”.
• Accredited or suggested association names – This means that a company cannot be called something which implies an association with local authorities or government-run business. In order to use “accredited” in a name, you have to receive permission from BEIS.

The second stage

Selecting directors

The second and arguably most important stage of the process begins with selecting the company director(s). It determines the individuals who have access to the business records as well as the accounts. 

The responsibility of a director

A director is responsible for upholding the company statement and following the company rules. This is the base expectation of any director, and one incapable of doing such cannot commit to the role.

Directors should be able to commit to or hire an employee that can:

• Keep company records and report any changes that occur within the company to HMRC. Changes viable for reporting include the company rules, directors or company status. This is, however, not all-inclusive and other reasons to report to HMRC might occur.
• Stay on top of bookkeeping and filing tax returns. This job can also be done by an assigned accountant.
• Let shareholders know if you can benefit from a transaction, and pay corporation tax. These jobs cannot be handed off to an employee as they deal with your personal affairs.

Picking directors

Directors should hold expertise for the business’s main field before all else. You are required to have quarterly meetings with a board of shareholders to update them on how the business is proceeding. Shareholders may elect to replace the director if they cannot provide a plan of action that satisfies the board.

It should be noted that a director does not need to be an owner by majority share of a business, they simply need to be a shareholder or guarantor. This means that directorship is the responsibility of those most capable rather than those who have ownership of the business.  

Optional – Picking a company secretary

A company secretary is able to take on a degree of responsibility that the director is assigned. This individual should be knowledgeable of the company, its rules, future plans and be able to abide by all of this knowledge.

Despite these responsibilities, a company secretary is limited in their capability. They are not allowed to be the company’s auditor, and they must not be an undischarged bankrupt (someone currently going through bankruptcy). The only exception to where a company secretary could be an undischarged bankrupt is if they have permission from a court.

Regardless of the aforementioned information and the jobs assigned to the company secretary, the director is still legally responsible for the company. With this in mind, the secretary should always be someone greatly trusted, and this should be considered before their qualifications.

The third stage

Everything regarding people with significant control (PSCs)

PSCs are necessary for a limited company as they are defined as people with control. A simple, common example would be major shareholders and the director, both would be counted among the PSCs. It should be noted that failing to identify current PSCs is a criminal offence.

Someone might be counted among the PSC’s if they have:

• A large enough amount of influence over the company decision would allow you to elect as a PSC. You would need to demonstrate that you have PSC status within a company through the confirmation of the director and the board.
• 25% of a company’s shares or voting power. Someone with this control of a quarter of the company (or above) need only show that they have it in order to have it recorded with HMRC.
• The right to approve or remove members of the board. This is a significant amount of control to have over a company, and should only be held by directors, owners of a company, or 75% shareholders. Anybody with this right should be registered as a PSC.

If a PSC meets any of the following criteria but fails to submit information that can be measured, they should have restrictions imposed on them to remove/limit their status. It is the company owners’ legal responsibility to provide PSC information and restrictions must be imposed for protection.

The memorandum and articles of association

These are important documents that denote how a company is run. They also serve as an agreement for the initial shareholders. 

Memorandum

A memorandum is the first agreement for the company, signed by all shareholders or guarantors. Put simply, it’s the agreement that all parties are consenting to the creation of the company. It also complements the articles of association as a form of agreement to uphold and abide by the company rules and scope.

Articles

The articles of association are far more complex than the memorandum. It could even be considered that the memorandum is simply a document saying you will follow the articles.

An article is a legal document that defines the scope and rules of a company in detail. You can find templates on the gov.uk website which are suitable for any limited company. Any violations to this document fall under what is known as ultra vires. Participating parties, both the business and outsider, will not be able to enforce the contract, meaning that it’s void. All members of a business should uphold the articles of association. As a result, anybody within the business can stop something which is considered ultra vires.

The final stage

What documentation do you keep?

A company should be able to keep their records, and for an extended amount of time. When keeping documents, there are two main points that should be kept in mind: The first is that you must notify HMRC if the documentation is kept somewhere that isn’t the registered office. The second is that you must keep certain documentation for a period of 6 years. Documentation which fits this quota includes:

• Transactional documents which cover more than a single accounting period
• Documents corresponding to the  equipment or machinery acquired by the company, which they expect to last longer than 6 years
• Late company tax returns
• Documents showing when and if HMRC have ever started a compliance check into the company tax returns

If the documents are not compliant with that list, then you are safe to get rid of them after 2 or more years.

Company records must include:

• The information of the directors, shareholders and any secretaries
• The resolution of any shareholder votes
• The promise to pay back any loans, as well as payee information
• Any promises the company makes to provide indemnities
• Transactions where shares in the company were purchased
• Loans or mortgages that have been secured against any company asset

Accounting records must include:

• Accurate records of all money spent and received by the company, including any grants and payments from the covid-19 support schemes
• Details of any assets or debts (both owed or owes)
• Any stocks the company owns at the financial years conclusion, as well as the stocktaking used to work out the figure
• All goods bought and sold, and details of who bought and sold them. Retail businesses are exempt from including who bought and sold said goods.
• Any other financial records relevant to preparing and filing the company tax returns

Any records that are lost, stolen or destroyed should have the best efforts made to recreate them. You should then notify the corporation tax office, and include what happened on the company tax return.

Registering the company

Finally, you can register with HMRC. In order to do this, you need to register an official company address and choose an SIC code, used to identify the actions of the company.

When picking the official company address, there are some rules which limit where it can be. It must be a physical address within the UK, in the same country that the company is registered in. For example, a Scottish company address should be in Scotland. 

If you don’t want your company address to be public, you have the option of using a different address with permission. You can also appoint a company formation agent who will give you an address you can use.