Finding a great business idea is not enough to make it work. Let us assume that you have already decided what your product will be, that you know how you will promote it, that you know who your potential clients are, that you have estimated the start-up costs and that you even understand the risks.
Now you must carry out certain formalities. These may at first seem tedious but they are crucial for the future operation of your business. The decisions made at this point will predetermine your legal, accounting and tax obligations.
Learn step by step how to form a company in the United Kingdom.
Step 1: Choose a legal form
First you must know what kind of company you should register. Many businesses register as sole traders, limited companies or partnerships.
This is the simplest way to organise your business. A sole trader runs his-or-her own business as a self-employed individual. He-or-she disposes of all his/her business profits after taxation.
When registering as a sole trader you do not create an entity with its own “legal personality” that is separate from that of its owner. This is why a sole trader is personally liable for all debts and losses that the business may suffer.
To become a sole trader you must register with Her Majesty’s Revenue and Customs (HMRC). Registration with Companies House is not required unless you want to safeguard your business name. Sole traders must submit annual self-assessment tax returns to HMRC.
Two or more persons who intend to carry on a business together with a view of profit may form a partnership.
A general partnership is not a separate legal entity. Its partners generally have unlimited liability, so they are responsible for the debts and losses of the business much like a sole trader, which liability they share.
A limited partnership (LP) consists of one or more general partners, who are liable for all obligations of the firm, and one or more limited partners. A limited partner contributes a certain amount to the partnership and is liable for the debts or obligations of the business only up to the value of what he-or-she has contributed.
A limited liability partnership (LLP) is a legal entity which combines the features of a partnership and a limited company. It is a corporate body that is best suited to partners who are engaged in a profession – for example lawyers, accountants, medical practitioners etc.
A limited company is a legal entity with a legal personality which is separate from those who own or run it. A limited company is owned by its members (shareholders) and is managed by one or more directors.
Its main advantage is the limited liability of its members. This “limited liability” means that the company’s finances are separate from the personal finances of its members. The members’ private assets are not generally at risk, even if the company were to become bankrupt. Their personal exposure to creditors of the business is therefore limited.
All limited companies must be incorporated, i.e. registered, at Companies House under the Companies Act 2006. They must keep accounting records and comply with certain filing requirements.
A limited company must pay corporation tax on its business profits and file company tax returns. The company will most likely need also to register with HMRC for value added tax (VAT) and submit VAT returns.
We will focus below on the formation of a private company that is limited by shares, which is the most common type of company used by small and medium businesses in the UK.
Step 2: Create a company name
It is best to create a company name that is both original and meaningful, i.e. informative about the nature of the business. Choose a name that your customers and suppliers can easily spell and remember.
Avoid names that are identical with, or confusingly similar to, existing ones. To do this you should check whether your company’s proposed name is available.
The use of some words and expressions in a company name is restricted or may require special permission. These are “sensitive” words that may suggest that your company is in some way affiliated with public authorities or professional associations. If this is not the case then it could mislead your target customers or business partners.
Since you are setting up a limited company its name must end either with the word “Limited” or its abbreviated form, “Ltd”.
Step 3: Enter your company particulars
Companies House will require the following details about your company, most of which will be available and visible to the general public upon your company’s incorporation:
Principal business activity
You should choose the most relevant trade classification code (SIC or Standard Industry Code) and briefly describe the company’s proposed business activity. Some activities require a business licence from a relevant authority or body, so you should check whether your company will need such a licence.
Your company’s registered office must be situated within the United Kingdom. The registered office address must be in the same part of the UK in which your company is registered, for example a company registered in England & Wales must have its registered office within England or Wales.
The registered address does not necessarily need to be your company’s principal place of business but you must always have access to all correspondence that is delivered to the registered address, for example notifications from Companies House or HMRC, legal claims and others.
A company must have at least one director, who must be an individual who is at least 16 years old. A director must give his-or-her written consent to act as a director of the company.
When registering a company you must specify any director’s full name, date of birth, nationality, country of residence, service address and usual residential address.
A company that is limited by shares must issue shares and allocate them between its subscribers, in other words its initial shareholders. A company must have at least one shareholder, also known as a member.
There is no maximum number of shareholders.
One person can be both a director and a shareholder at the same time.
Initial shareholders’ particulars include their names and addresses and the class, number and nominal value of all shares held by them. It is common practice for a company to issue 100 ordinary shares with a value of £1 each.
People with significant control (PSCs)
You must state the names and details of any and all persons who exercise significant influence or control over your company. (There are special circumstances in which one need not do this, but these are most unlikely to apply when setting up your company.)
In most cases a PSC is usually an individual who holds more than 25% of the shares and/or voting rights in the company. A PSC may, however, be someone who exercises significant influence or control in the company even without having such a formal membership interest in it.
Step 4: Prepare the Memorandum and Articles of Association
These two key constitutional documents formalise how your company will be organised and managed.
The memorandum of association is now limited to a statement that the members wish to form a company, under the terms of the Companies Act 2006, and that each member agrees to hold at least one share.
The articles of association lay down the rules of issue and transfer of shares, appointment and removal of directors, payment of dividends, decision making by directors and shareholders (for example by meetings and/or voting) and other fundamental provisions.
You may choose the model articles prescribed by the statutory Regulations or draft your own articles which take into account your specific needs (bespoke articles). In the latter case it is recommended that legal advice be sought.
Step 5: Submit the required information to Companies House
A company is formed by filing the required details with the Registrar of Companies at Companies House, in accordance with the Companies Act 2006.
If you are very knowledgeable and experienced in such matters then you may try to do this yourself, using the online registration service offered by the government website. Otherwise, we recommend that you use Uniwide Formations as a formation agent who will provide a turn-key solution for your maximum convenience throughout the registration process, helping you to get everything completed quickly and easily and ensure that it is all correct, avoiding any legal or other pitfalls.
Company registration usually takes 24 hours. A company officially comes into legal existence when a certificate of incorporation for the company is issued.
Setting up a business is not limited to company registration. Here are some further points that deserve consideration (although there is no exhaustive list):
Opening a business bank account
To send, receive and securely store its funds a company must have a business bank account in its name. You must specify your bank account details in contracts and invoices issued to customers or business partners.
It is essential to select the right bank or other payment service that can provide an account that is suitable for your company. The choice will depend upon your average turnover, the type and frequency of transactions, the level of bank fees and other terms.
If you take on employees then you will become responsible for running a payroll, ensuring health and safety at work, paying tax and National Insurance and other matters besides. For this reason you will need also to register as an employer with HMRC and obtain a PAYE reference number. This registration is required even if a company has only one employee; its director.