Setting Up a Limited Company: What to Expect and How to Do It 

Sole trader, partnership, limited company or umbrella company - these are the different ways you can set up your business when you have a fantastic business idea or if you decide to take your skills freelance. With so many routes to choose from, it’s no surprise when budding entrepreneurs are left confused about which path is the right one for them. 

Many startups opt to form as a limited company, and for many businesses, it’s one of the most tax-efficient ways to operate. But like anything in life, there are both pros and cons to bear in mind. Before you make any decisions, it’s important to know exactly what a limited company is, how it should be managed, what your obligations are, and how it affects you on a business or personal level.

The thought of becoming a limited company may seem daunting and present you with challenges you’re unfamiliar with, but it offers you and your business the opportunity to reach heights that may have been unobtainable before.

Making that shift to a limited company is a big step for any business owner or sole trader, but it comes with rewards and allows you and your business to flourish.

So, are you looking for advice on starting a new business and forming a limited company? Before you start filling out an application to Companies House, there are lots of things to think about. From getting all your documents in order to check what records you’ll need to keep once you’re trading, every stage of the process needs to be considered carefully. Learn more in our article.

What Is a Limited Company?

Startups often decide to set up as a limited company for several reasons, one of those being tax efficiency. Compared to the sole trader setup, you’ll pay less tax - and this is why so many successful freelancers opt for this structure even when they work alone. So exactly what is a limited company in the UK, and what does it mean for the directors?

A limited company is a type of business structure for companies that operate in the UK. You will need a UK business address to register. However, that doesn’t mean that people overseas can’t launch a business venture here. As long as they have an official address in the UK, they can still register as a limited company. 

As well as the potential tax savings, one of the biggest reasons people choose to go limited is because of the limited liability - this is what it’s named after. Having limited liability means that your business is completely separate from you. This gives business owners a certain level of protection against things such as financial loss. In simple terms, if something goes wrong, your personal credit shouldn’t be affected. 

Because your business is separate from you and other directors, it also means that your company will exist beyond the life of those directors and shareholders. Meaning employees working for a limited company will have better security, even after you and other shareholders decide to leave.

Why Set Up a Limited Company?

Setting up a limited company protects you by distinguishing you and your business as two separate entities while still allowing you to retain full control. That means that should your business run into difficulties, the business - not you - will be responsible for any debts. That peace of mind alone is by far the greatest reason to consider the switch from sole trader to a limited company.

You’re free to appoint additional shareholders, which can be family, who will have limited liability.

Tax rates for limited companies tend to be more favourable, and if you employ staff, paying them via Pay As You Earn (PAYE) is easier.

For a majority of the day-to-day operations of the business, when you make the change you’ll see no impact, and it will be business as usual. However, the tax benefits and the ability to separate yourself from the business are two of the biggest benefits.

Things to Consider Before Becoming a Limited Company

Before making the decision to become a limited company, there are a number of factors you should consider:

• There are additional costs involved, as well as forms to fill in which can take time. At Hoxton Mix, we offer company formation for just £10
• The name of your company must be unique to you, and not contain any sensitive words
• You need a registered address where post can be sent. Some businesses use their home address, however, for added professionalism, Hoxton Mix can provide you with a business address and sort and scan your post for you
• How will you structure your shares? Will you be the sole owner, or will there be other shareholders, such as a family member? Your accountant will be able to advise you on the best approach for your business
• All registered companies need a set of Articles, which dictate all aspects of the company and how it’s run. It is possible to use ‘model articles’, which is a generic document, and something that can be applied to a majority of cases
• Decide on up to four SIC codes that best describe what service your business provides. A full list of SIC codes is available on the government website.

How to Set Up an LTD Company

Want to know how to set up an Ltd company in the UK? Here’s a step by step guide that covers all the stages of company formation. 

Step 1 - Check if it’s right for you

Before you look at how to open a Ltd company in the UK, it’s important to check that it’s the right move. While there are some great tax benefits for limited companies, there are some setups that may be more suited as sole traders or partnerships.

If you need advice, speak to an accountant, business advisor or someone you know with experience running their own business. There are pros and cons to being a limited company, so familiarise yourself with these before you start applying. 

Step 2 - Choose a company name 

Coming up with a memorable and suitable business name is an important part of the process and will form the building blocks of your future brand. Some general tips include avoiding hard-to-spell names, picking a name that doesn’t limit you when you grow, and always checking whether other similar names exist.

Through our company formations partner Crunch, entrepreneurs can check the availability of their name online. 

Step 3 - Appoint company directors

After you have decided on the name of your business, you will need to appoint at least one company director. Directors are legally responsible for running the company, and they will be responsible for making sure company accounts and reports are prepared correctly each year. You may also want to appoint a company secretary, although this isn’t mandatory. 

In the UK, a director must be aged 16 or over and must have a UK registered office address. However, they are not required to live in the UK.

Step 4 - Set shareholders and guarantors

You must also have at least one shareholder or guarantor who can be a director. At this stage, you will also need to identify any people with significant control (PSC) over your company. They are sometimes called ‘beneficial owners’, and they could be you or someone else who is associated with your business. Most PSCs are likely to have over 25% worth of shares, over 25% of voting rights, and authority to appoint or remove the board of directors. Once these people are identified, they must be added to your company’s PSC register.

Step 5 - Prepare the documents

Before starting the application process, be sure to have all your paperwork in order. When you register, you will be asked for a 'memorandum of association', which is a legal statement signed by all initial shareholders. You will also be asked to provide your 'articles of association', which is a written set of rules for running the company that has to be agreed by the shareholders or guarantors, directors and the company secretary.

Step 6 - Check responsibilities

If you want to know how to set up an Ltd company in the UK successfully, it’s important to understand your obligations as a director. When it comes to running your business, there are rules to follow. Before you submit an application and get the ball rolling, familiarise yourself with these and make sure other directors and your company secretary are up to date.

The things you’ll need to learn are the process for taking money out of a limited company, updating accounting records, reporting on company changes, your annual confirmation statement, and the rules on showing your company name on signs, stationery and promotional material.

Step 7 - Make an application

There are a number of ways of making an application. You can apply directly with Companies House via post (£40) or online (£12). But when it comes to getting advice on how to set up a limited company, UK formation agents are a good place to turn. Alternatively, accountants can provide advice in person but will charge for their time.

Our chosen partner Crunch can offer its company formation service for just £10, and we can give you a free £10 credit to cover the costs if you purchase our virtual office plan at Hoxton Mix.

What Happens Once You’ve Set Up a Limited Company?

Once you’ve made the decision and taken steps to register your company, what else do you need to do during those first few days, weeks, and months?

Set up a business bank account

You’ll need to keep your personal finances and your business’s finances separate, so set up a business bank account as soon as possible. Don’t just settle for the same bank as the one you already hold your personal account with, shop around to make sure you’re getting the best service for your needs. 

To set this up it’s likely you’ll need a form of ID and your certificate of incorporation.

Get business insurance

Business insurance is a must to cover you in the event of something unexpected happening, such as loss or damage. Depending on the type of business you run, there are different levels of cover you will need, which can include:

• Buildings and contents insurance
• Public liability insurance
• Product liability insurance 
• Income protection insurance
• Employers liability insurance 

You should thoroughly understand which sort of insurance your business needs to avoid unnecessary costs and headaches down the line.

Set up a website

Getting your name out there is an important step to finding new customers and growing your business. The first thing people do when considering making a purchase or hire is search for a website - and a professional-looking site with strong testimonials will go a long way to cementing your business as one that is trustworthy.

Tell the taxman

There will be administrative tasks that need to be completed in the short term, such as registering for corporation tax within the first three months, and alerting HMRC if you pay any employees.

HMRC will automatically issue your business with a UTR (Unique Taxpayer Reference), which is used to identify your business for tax purposes. If your company expects a turnover of more than £85,000 in thirty days you will also need to register for VAT.

Keep thorough records

Don’t throw away any correspondence you receive from Companies House and HMRC. If you’re unsure whether to hold onto something, double-check. 

Make sure you keep up-to-date financial records, ensuring you don’t miss or skip anything. As the director of a limited company, it’s your responsibility that all records are correct so you pay the right amount of corporation tax. 

Put down everything you do in writing. That includes any terms and conditions, policies, or shareholder agreements.

Be aware of key dates

There are a number of important dates to be aware of, including:

• Confirmation statement, which is sent to Companies House every 12 months
• Annual accounts, which are submitted to Companies House every 12 months
• Tax return, which is collated and sent to HMRC annually within 12 months of the tax year-end
• Corporation tax must be paid to HMRC within 9 months of the end of the accounting year

Hire someone to help

If your finances allow for it, consider hiring an accountant. Administrative work can be lengthy, so bringing someone new into the team can help reduce the pressure on you. This can be another shareholder, who could potentially be a family member.

Be open about your finances

This is especially important if there are multiple shareholders. If things are looking good - or bad - then be honest and open with everyone who has an interest in the business.

Make the difficult decisions

You’re now making decisions for the company, and not just yourself. Remember, in the event the company fails you’ll no longer be at risk of being financially accountable. That being said, this is a business you’ve been running for some time, and you need to have the bigger picture in mind when making decisions.

Continue running your business

With the change in your company status comes a change in job title for you to Director. However, the day-to-day operations of keeping customers and clients happy shouldn’t change, so continue using all your skills, knowledge and experience to deliver at the highest standard.

Let Hoxton Mix Take Some Stress From You

Give your company that extra bit of oomph by having your registered address be in the heart of London. Check out our virtual office services for more information.