Seven Things To Decide Before You Set Up A Limited Company

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Setting up a limited company is a significant step in your professional life. Next year is predicted to be a positive year when it comes to the UK’s economic growth. The Treasury expects five per cent GDP growth in 2022. Furthermore, much of the uncertainty surrounding Brexit and the Coronavirus pandemic will have receded, giving businesses the confidence to undertake expansion projects they may have been postponing.

Whether you are launching a startup, transferring your organisation’s legal structure from a sole trader or a partnership, or establishing a subsidiary in the UK, there are several factors you need to consider.

Your company name

Choosing your company name will be one of the most important decisions you will make. Not only must the name be memorable enough to provide a foundation for your brand it needs to be unique and not contain any sensitive phrases or words. To find out if any other business is using your prospective company name you can use the company name availability checker. It is also wise to run a trademark clearance search to ensure the name you pick has not been trademarked by another organisation.

If the company you are forming is a private limited company the company name must end in ‘limited’ or ‘ltd.’ (or the Welsh equivalents) unless it is exempt. In the case of a public limited company, the terms ‘public limited company’ or p.l.c’ (or the Welsh equivalents) must come at the end of the name you choose.

You can find out more about how to choose a business name here.

Your company’s SIC code

A Standard Industrial Classification (SIC) code is used by Companies House and various other government departments to identify the type of economic activity all registered companies are involved in. If you do not have a SIC code Companies House will reject your application for registration.

To select the right SIC code you need to look up the list of SIC codes and pick the one that most identifies with your company’s business activities. In most cases you will only need to select one code, however, if your company is involved in several distinct economic activities, you will need to choose multiple codes.

Your company’s registered office address

To register your company you will need to provide a company address. This address must be a genuine physical address, not simply a PO Box number. If you are based from home or internationally, you may want to consider a virtual address citing one of the UK main cities. For example, Uniwide provides a registered office address package. You will receive:

  • A prestigious office address for your business in Kensington, London W8.
  • Any official government post will be scanned and e-mailed to you free of charge.

If you decide to use your home address it is important to remember that the information will be publicly available at Companies House.

The company’s officers

The company’s officers comprise the formally appointed directors of the company and the company secretary. They are the people that have been authorised to represent the company and make decisions as to how it is run. The initial directors are appointed by those who are company shareholders upon formation. After the company has been registered with Companies House, directors must be appointed in accordance with the Articles of Association.

One person can hold the position of shareholder, director, and company secretary.

Company directors must always comply with the directors’ duties that are set out in the Companies Act 2006, namely:

  • To act within powers.
  • To promote the success of the company.
  • To exercise independent judgment.
  • To exercise reasonable care, skill, and diligence.
  • To avoid conflicts of interest.
  • Not to accept benefits from third parties.
  • To declare any interest in a proposed transaction or arrangement with the company.

The shareholders and share structure

If your company is limited by shares then those shares represent a portion of ownership in the company. For example, if you hold 51 per cent of the shares in a company you are the majority shareholder. Shares can be owned by individuals or corporate bodies. Company shareholders are also referred to as members. As shares are an asset, they can be brought, sold, and transferred and these transactions may be subject to tax.

Different types of shares can be issued by the company. In most cases, especially when the company is first formed, ‘ordinary’ shares will be issued. Ordinary shares provide equal rights and responsibilities to all the shareholders. For example, if you and three friends set up a company to import and sell luxury chocolates you can each own 25 per cent of the company in ordinary shares. This share structure means all four of you have an equal vote and can split the profits four ways. Although this sounds incredibly simple two potential difficulties may arise:

  1. When deciding on a particular matter two of the shareholders may take one view with the other two taking another and no agreement can be reached. This is known as ‘deadlock’ and can prevent the company from taking the required action to ensure its commercial objectives are met. To avoid deadlock situations it is important to have a Shareholders’ Agreement in place that sets out, among other things, how disputes will be resolved. For example, the Shareholders’ Agreement may state that in the case of a deadlock a Mediator or Arbitrator must be appointed to facilitate a resolution.
  2. If you choose to take on an investor who wants a stake in the company, offering them ordinary shares means they have equal voting rights. You may not wish to allow a third party to have a lot of control as to how the company is run. To this end, you can issue different classes of shares that distinguish not only the voting rights attached to them but also the value of the shares. You can read more about different share classes here.

New companies commonly issue 100 shares upon formation which means each share represents one per cent of the ownership of the company. This makes working out dividends easy and you can issue several shares to multiple investors which is especially advantageous if you are applying for seed funding.

Identify People with significant control (PSC)

The Companies Act 2006, section 790B provides that every company:

  1. with voting shares admitted to trading on a UK regulated market or an EU regulated market, and
  2. companies of any description specified by the Secretary of State by regulations

must produce, keep, and maintain a PSC register. Companies are required to take reasonable steps to determine if there is anyone who is a registrable person or a registrable relevant legal entity in relation to that company and, if so, identify them in the PSC register.

A PSC includes people or legal entities that:

  • Own more than 25% of shares in the company.
  • Have more than 25% of voting rights in the company.
  • Have the right to appoint or remove the majority of the board of directors.

The purpose of the PSC register is to prevent money laundering, tax evasion, and other criminal activities from being conducted by people or entities hiding behind corporate veils whilst being based abroad. According to the Government review of the PSC register implementation:

“The aims of the register were to make it easier for the public and Law Enforcement Organisations to ascertain who ultimately owns and controls UK companies, to promote trust amongst the businesses and provide better intelligence for criminal investigations.”

Keeping the objectives of the register in mind may help you identify PSCs. You can read the full Government guidance on creating a register here.

Create your company’s Articles of Association

Your company’s Articles of Association (Articles) is the foundation document that sets out how the company will be run. It covers matters such as:

  • Directors’ powers and how they are to be appointed.
  • Decision making by shareholders.
  • The voting rights attached to shares and the different classes of shares that can be issued.
  • Dividend distribution
  • How shares can be sold or transferred.

You can use the ‘model articles’ which provides sufficient information for most organisations, and these can be adapted to suit your specific needs.

We have produced a comprehensive guide to Articles which can be found here.

Wrapping up

Taking the time to think about the seven points mentioned above will mitigate the risk of your company registration application being rejected by Companies House. It will also ensure that your business has a robust foundation in which it can attract investment and achieve its commercial ambitions.

If you are unfamiliar with corporate law in England and Wales and/or this is the first time you have set up a company you may wish to consider working with a company formations specialist. They will ensure that your company is set up correctly and provide you with expert advice on the above seven considerations.

Uniwide Formations specialises in the registration of limited companies and LLPs. As professional business service providers, we offer a wide range of related services and can advise you on all aspects of company and LLP formations.

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