Are you ready to take the leap from sole trader to limited company? Incorporating a limited company can feel like a significant milestone in your entrepreneurial journey. In this guide, I’ll walk you through the entire process of setting up a limited company in the UK, covering everything from the benefits of incorporation to step-by-step instructions on how to complete your application through Companies House.
Why Incorporate a Limited Company?
Many business owners choose to incorporate their businesses for several key reasons. Let’s explore the primary benefits of forming a limited company:
Tax Efficiency
Incorporating a limited company can be more tax-efficient compared to operating as a sole trader. As a limited company director, you have more flexibility in how you withdraw profits from your business, allowing you to optimise your tax position. Instead of paying income tax on your entire profit, you can choose to take a combination of salary and dividends, which can be more tax efficient.
Limited Liability
The term “limited” in limited company refers to limited liability. This means that the business is a separate legal entity from its owners. As a director, your personal assets are protected in the event that the company faces financial difficulties or legal claims. The company’s debts and liabilities remain separate from your personal finances.
Enhanced Credibility and Status
Operating as a limited company can enhance your business’s credibility. Some suppliers and clients prefer to work with limited companies, and certain opportunities, such as wholesale accounts or larger contracts, may only be available to businesses that are incorporated. The status of being a limited company can give your business a more professional image.
Responsibilities of Running a Limited Company
While there are significant advantages to incorporating, it’s essential to understand the responsibilities that come with owning a limited company. Here’s a breakdown of what you’ll need to manage annually:
- Annual Accounts: As a limited company, you must prepare a set of annual accounts and file them with Companies House.
- Corporation Tax Return: The company must submit a corporation tax return to HMRC and pay any corporation tax due.
- Self-Assessment Tax Returns: If you withdraw profits from the company, you’ll need to complete a self-assessment tax return to declare your income.
- Confirmation Statement: This is an annual statement confirming that the information Companies House holds about your company is accurate. Any changes made during the year must be updated during this process.
Understanding these obligations is crucial before proceeding with incorporation.
Key Roles in a Limited Company
Before you incorporate, it’s important to understand the key roles within a limited company:
- Director: Responsible for the day-to-day running of the company. They make decisions on behalf of the business.
- Shareholder: The owners of the company. They receive a share of the profits in the form of dividends.
- Company Secretary: This role is optional for most small businesses. If you don’t appoint a separate company secretary, the director is responsible for these duties.
In many small businesses, the same individual often acts as the director, shareholder, and company secretary. However, larger companies may have different individuals fulfilling these roles.
Step-by-Step Guide to Incorporating a Limited Company
Step 1: Visit Companies House
Start by visiting the Companies House website. This is the official government body responsible for registering and maintaining company records in the UK.
Step 2: Register a Private Limited Company
On the Companies House website, select the option to “Set up a private limited company.” You’ll be asked to complete a series of forms to provide details about your new business.
Step 3: Choose Your Company Name
One of the most exciting parts of the process is choosing your company name. Make sure it’s unique and not already registered. You can check for existing trademarks on the Companies House website to avoid any conflicts.
You’ll also choose whether your company name ends with “Limited” or “Ltd.” There’s no difference in terms of legal status, so it’s purely a stylistic choice.
Step 4: Provide a Registered Office Address
The registered office address is the official address of your company. This address will be publicly available on the Companies House register. If you prefer not to use your home address, many accountancy firms offer registered office services as part of their packages.
Step 5: Create a Government Gateway Account
You’ll need a Government Gateway account to interact with HMRC online. This account allows you to manage your company’s taxes, submit returns, and make payments electronically.
Step 6: Enter Director and Shareholder Information
Next, you’ll need to provide details of the company’s directors and shareholders. If you’re the sole director and shareholder, you’ll enter your own information.
- Director’s Responsibilities: Directors are responsible for managing the company and ensuring compliance with legal obligations.
- Shareholder’s Rights: Shareholders are entitled to a share of the company’s profits through dividends.
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At striveX®, we specialise in helping UK limited companies manage their finances with confidence. Whether you need advice on directors’ loans or support with company accounts, our experienced team is here to assist.
Step 7: Allocate Shares
You’ll need to allocate shares to the shareholders. Most small businesses issue 100 shares, making it easy to divide ownership if needed in the future. The value of each share is typically set at £1.
Step 8: Declare People with Significant Control (PSC)
People with significant control are individuals who own more than 25% of the company’s shares or voting rights. You’ll need to declare these individuals to Companies House.
Step 9: Agree to the Articles of Association
The articles of association are the rules governing how your company operates. You can use the standard model articles provided by Companies House or upload your own.
Step 10: Pay the Incorporation Fee
The fee to incorporate a limited company is £12. You can pay using a debit or credit card or through PayPal.
Step 11: Submit Your Application
Once you’ve completed all the steps, it’s time to submit your application to Companies House. Within two working days, you should receive your company registration number and a certificate of incorporation.
Final Steps After Incorporation
After you’ve incorporated your limited company, there are a few additional steps to take:
- Open a Business Bank Account: You’ll need a separate bank account for your company to keep your business finances separate from personal finances.
- Register for Corporation Tax: HMRC will automatically register your company for corporation tax. You’ll receive a letter with your company’s unique tax reference number.
- Set Up Payroll (if applicable): If you plan to hire employees or pay yourself a salary, you’ll need to set up a PAYE scheme with HMRC.
Are you maximising your expenses?
Checkout our Expenses Explained booklet detailing allowable expenses for limited companies. Covering wages, insurance, rent, maintenance, travel, advertising, and more, it’s your ultimate guide to maximizing deductions and optimising finances.
