Going limited - how to get started
Posted on 29th September 2022
In 2021, the total number of limited companies registered with Companies House increased by 8.4% compared to 2020, and small and medium sized enterprises (SMEs) currently make up 99.3% of the UK’s economy, with a third of these businesses being located in London and the South East of the country.
Entrepreneurship is not the only reason more and more people are starting their own businesses and going limited. The tax breaks for the self-employed tend to be attractive to those who’ve been stuck in employment for much of their career, as well as the relative freedom experienced by those who decide to work for themselves.
Whatever the reasons are behind the year-on-year increase in entrepreneurs in the UK, the basic fundamentals of setting up your own limited company haven’t changed - and neither have the legal obligations associated with being a company director.
Many small business owners choose to remain sole traders, but when your company reaches a certain level of profit, it can be wise to look into going limited in order to benefit from the tax breaks available to you.
What are the different types of limited company?
A limited company is called as such because it is either ‘limited by shares’ or ‘limited by guarantees’.
Limited by shares is a company that is intended to make a profit, is a separate legal entity from whoever runs it (i.e. the director/directors), and it has its own separate finances. The clue is in the title in that the company has shares and shareholders and the owner can keep the profits generated after paying tax.
Limited by guarantee is a company that is usually not for profit, so used for charities, community projects, clubs, societies and other similar bodies. Again, the company is run by members who are legally separate from it, and it has its own finances, but it also has guarantors (again, the clue is in the name!) instead of shareholders, and any profit made is invested back into the company rather than withdrawn by those who run it.
How do you choose a name for your limited company?
When setting up a private limited company, you must follow certain rules when choosing a name. We recommend that you check on the Companies House website to see if the name you have in mind is already taken.
If you choose a name that is too similar to another company’s name or trademark, there may be objections, and you would have to change it.
For example, imagine that John Doe Services Ltd is already incorporated. If a company wanted to register as JohnDoeServices Ltd, or even John Doe Service Ltd, the original company could technically object to that name, as it is extremely similar to theirs with very minor differences.
You are not permitted to use anything that is considered offensive, nor anything that suggests you are connected to any local authority or government body without permission. However, you can trade under a different business name to your official registered company name. So, if you have a company registered as Your Name Ltd (e.g. Jane Doe Ltd) but you wanted to trade as Jane’s Jewellery, for example, you’d be permitted to do so.
Your registered name must be followed by Ltd or Limited, unless your company is a registered charity or limited by guarantee.
Who do you need to appoint when you open a limited company?
As a limited company you must appoint:
At least one director, who runs the company
A ‘limited by shares’ company must have one or more shareholders, who own the company
A ‘limited by guarantee’ company must appoint a guarantor and a ‘guarantor amount’, which is an agreed amount of money to the company if it cannot pay its debts
A Person with Significant Control (PSC) refers to the person or people who have control over the company
These appointments can all be the same person and as director they must fit the following criteria:
They must be over the age of 16
They must not be disqualified from being a director
Their names and personal information must be registered and publicly available from Companies House
They don’t have to live in the UK but must have a UK address
They must supply a service or correspondence address
If your correspondence address is your private home address, you can request that Companies House remove it from the register.
You do not have to appoint a Company Secretary, but if you do, they cannot also be the company’s auditor and they mustn’t be an ‘undischarged bankrupt’. Click here to use the Insolvency Register to check if someone has been discharged
What documents are required when you open a limited company?
You are obliged to prepare a document that stipulates how you are going to run your company; this is called a ‘memorandum of association’.
This is a legal statement agreeing to form the company and is signed by all the initial shareholders or guarantors. You will also need ‘articles of association’, which are the company’s written rules about how it will be run.
When you register your new company online with Companies House, they will provide you with a memorandum of associate. If you choose to register your company by post, you can use this template.
For the articles of association, you can either write your own or use these standard model articles.
What responsibilities do you hold as the director of a limited company?
As the director of a limited company you have certain legal obligations and responsibilities, and although you can hire other people, such as an accountant or bookkeeper, to help you manage these things, in the eyes of the law you are responsible for:
Following the company rules as written in the articles of association
Keeping company records and reporting any changes to Companies House
Filing your corporation tax return and accounts
Telling other shareholders if you may personally benefit from a transaction the company makes
Paying your corporation tax
If you do not fulfil these responsibilities, you may be fined, prosecuted or disqualified from being a company director.
The GOV.UK website offers a step by step guide on how to set up a limited company.
As the director of a new limited company, you will need to be knowledgeable about many aspects of running your own business. We offer practical advice for company owners via our blogs on the following topics:
If you’ve recently started your own limited company or you’re looking to incorporate one soon, then get in touch to see how we can help you keep up with your legal and financial obligations.
Nicola J Sorrell - Effective Accounting
Founder | Xero Champion | IR35 Expert
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