Setting up a limited company

Why set up a limited company? After all, it’s likely to involve more administration and higher costs than if you were a humble sole trader.

Essentially, the answer concerns personal financial liability. If you’re a sole trader and your business fails, you’re personally liable for its debts. Potentially, you risk personal bankruptcy if the debt is considerable and you can’t pay it.

What is a limited company?

A limited company is a separate legal entity and as such it’s legally responsible for its own actions. Its finances are separate from those of its owner(s). Private limited companies can have one or more shareholders, but shares cannot be sold publicly (ie on the stock market).

Providing you don’t trade recklessly or fraudulently, as a director your risk of loss is restricted to money you’ve invested in the company. However, you’re liable for bank loans if you provide personal guarantees.

To an extent, being a limited company might make you more credible to potential customers, partners or investors.

Setting up a limited company

To become a limited company, you register (‘incorporate’) at Companies House. For a small fee, an accountant, solicitor or agent will do this for you. All you need do is provide some basic information and a few signatures. 

Ready-made company names are available to buy, should you wish. Alternatively, if you want to form a brand new company, you must send a memorandum of association, articles of association and a completed IN01 form to Companies House.

A memorandum of association details the company’s name, registered office and nature of business. It must be signed by the director(s) in front of a witness. A registered office is the official company address, which is where Companies House will send notices, letters and reminders. The articles of association set out the rules for the running and regulation of the company.

Companies House cannot supply memorandum and articles, but these can be bought from a legal stationer or company-formation agent.

Limited companies – roles and responsibilities

Private limited companies must appoint at least one director, who can also be a shareholder in the company. Someone cannot assume this role if they’ve been disqualified from acting as a company director; if they’re an undischarged bankrupt; or are less than 16-years-old.

Private limited companies no longer have to appoint a company secretary. Directors are responsible for notifying Companies House of changes in the structure and management of the company.

Accounts must be filed with Companies House each year ahead of the requested date, otherwise a fine is payable. Unless the company is exempt, accounts must also be audited annually. The company (or its accountants) must inform HM Revenue & Customs, by means of an annual return, of any taxable income or profits. Corporation Tax is then payable.

Company directors are employees of the company and must therefore pay income tax and Class 1 National Insurance contributions. Profit from limited companies is usually distributed to shareholders as dividends.