Setting up a limited company in the UK is straight forward, inexpensive, and remarkably quick. Limited companies offer many advantages over being a sole trader, particularly in the area of keeping and accumulating cash in your business.
Welcome to the Wise Accountant’s guide to setting up a limited company
What is a limited company?
Setting up a company creates a “moral person” in UK law. Your company is a unique entity entirely different and separate from you and your other shareholders (if you have them).
Just like you, it can make or lose money. It can take on loans and overdrafts. It has its own system of tax it needs to adhere to.
A company is distinct from you. Whatever income it brings in belongs to the company and is subject to the corporation tax laws of the land, it does not belong to you.
Yes, you own the company and can direct the company to pay you money but, in law, it’s the transfer of money between a “moral person” and a “natural person” (i.e. you).
When your company transfers money to you, you are subject to the personal taxation laws of the land for that transfer.
Choose a name
You can call your company anything you want, albeit with a few restrictions.
There are “sensitive words and expression” that require you to obtain the prior approval of the Secretary of State if you want to use them in a company name. You can see a list of those names at the bottom of this article.
Make sure your name sums up who you are, what you believe, and, more importantly than ever, the domain name for it hasn’t been taken. As soon as you’ve decided the name, buy the domain name straight away!
Your share structure for dividends
Now, you’ve got to decide how you want to divide up the shareholding.
How you decide how to divide up the shares is up to you. Let’s say that you and a friend were putting money in to start your company. You were putting in £7,500 and your friend was putting in £2,500. You may wish to split the shares 75% to 25% based upon introduced capital.
If you are setting up business with your spouse or civil partner, it would be advantageous for you to both own shares. That’s because you’ll both be entitled to £11,500 in personal allowance and £5,000 in dividend allowance, meaning that your household will not start paying income tax until (divided equally between you), you’re earning £33,000.
Wise Accountant tip – the dividend allowance reduces from £5,000 to £2,000 from April 2018.
How shares are divided up is important as it will dictate how much you and the other shareholding directors can draw in dividends as they are normally paid out proportionately to shareholding.
You can issue different types of shares in your company for different reasons. If you have a particular corporate structure in mind when it comes to how dividends are paid out, ownership of the company, and each person’s role within the business, speak with a good accountant to put together a shape that suits what you have in mind.
Your memorandums of association
You’ll need to prepare Memorandums of Association for registering at Companies House.
This is a very important document as it informs everyone about:
• why you set up the business, and
• the rules that are in place to run it.
Later on, it may be used in tax disputes and legal proceedings to help tax judges and law judges arrive at decisions on disputes between you and the other shareholders and between the company and the authorities.
You can download templates of Memorandums of Association and use them to file at Companies House.
Alternatively, it may be wise for you to seek professional help and advice from accountants or solicitors, particularly solicitors who can stress-test the Memorandums of Association against commonly-occurred disputes and disagreements intra-company and with public sector organisations.
Should I take advise from solicitors and accountants?
It’s up to you. Even the closest friendships, family relationships, and even relationships between spouses and civil partners can come under unbearable strain caused by the financial, emotional, physical, and psychological pressures of running a business. We all know how hard it is to run a company which is struggling. It’s just as hard, in many ways, to run a successful company too.
Taking advice from an accountant can help you with tax structures and taking advice from a solicitor can help you with shareholder disputes, all of which can be covered in your Memorandums of Association.
Register with Companies House
Now everything is in place – your name, your proposed share structure, the cash to start your business, and your Memorandums of Association.
All you have to do now to become an official shareholding director of a limited company is to register it online with Companies House. Set-up fees are very low and the system to establish your new company is quick and online.
When you register, it will make sure there is no conflict over your name and it will ask you to name your company director, company secretaries, and the persons holding significant control in the business.
Wise Accountant tip – a person of significant control (PSC) is anyone within your business who has 25% or more of the shareholding and/or the voting rights at board meetings. PSCs can appoint or remove the majority of the directors or management of a business, and can exert a large influence or control over a company.
Choose an accountant
If you’ve already worked with an accountant to set up your company, you trust their abilities and you’re happy with their fees, this might be the best accountant to choose to launch your entrepreneurial career with.
It’s best to play three to four accountants against each other in the early days. That’s not just because you’re trying to get the best price. Your accountant is one of the people you will come to rely upon most in business. Arguably, your accountant will be your closest business confidante and friend.
You have to feel a personal affinity with them and they with you. Your accountant is going to be relying on you for work and for your fees. You’re going to be relying on your accountant to keep you out of trouble. Does your accountant still sound excited about what they do and the idea of representing you? Do they strike you as the type that look for both opportunities and problems and will alert you proactively?
Choose your accountant carefully and he or she will be there with you protecting and enriching you for the months and years ahead.
Open up the company bank account
There are plenty of choices for you when selecting a bank account for your business.
It can take up to 2 weeks to open a business account and, on most occasions, they’ll ask you to go to a branch and meet a business manager. When you’re there, you’ll be required to present two forms of identification to prove who you are – normally a passport or driving licence with your picture on it and a couple of utility bills sent to your home address which are less than three weeks’ old.
Once approved, you’ll receive your cheque book, paying-in slip book, and your debit card.
Most banks will offer a period of free business banking to incentivise you to sign up with them so choose the offer that’s best for you.
Do you need to register for VAT?
You only need to register for VAT if your turnover is higher than £85,000.
You can apply online for VAT registration by clicking here. When you register for VAT, you’ll also create a Government Gateway account. This will come in handy later as it not only allows you to submit your VAT return online but you’ll also be able to handle payroll, corporation tax, and more through your Gateway account.
Once you have appointed an accountant, you can ask them to register you for VAT. Your accountant will also sign up with HMRC to become your “appointed tax representative” so they’ll be there to answer any HMRC queries.
What start-up expenses should I cover?
It’s always best to start with 3-6 months’ personal running money so that you can pay your domestic bills as you’re building your business up.
How much of what you use personally can be used in the business too? Whatever you purchase to run your business, try to minimise your expenditure as much as you can.
How should I fund the company?
Wherever you can, try to fund it with your own money. Don’t “give” your money to the company, instead you should lend it. If you lend it, the company is in debt to you and you won’t pay any tax or national insurance on the repayment of the capital of the loan. Any repayments made by your company to you would also not eat into your annual personal allowance.
Welcome to the world of being a shareholding limited company director! Always check back with the Wise Accountant to read the latest news and advice on all matters related to running a business and corporate & personal taxation.
Earlier in this article, we mentioned that some names require permission from the Secretary of State to be used in your limited company’s name. Click here to find out how to appeal to make use of these words and phrases.
|A||Accounts Commission for Scotland||Accredit||Accreditation||Accredited|
|Accrediting||Alba Na h-Alba||Albannach||Archwilydd Cyffredinol Cymru|
|Auditor General||Audit Office||Auditor General for Northern Ireland||Auditor General for Scotland|
|Audit Scotland||Auditor General for Wales|
|C||Chamber of Commerce||Chamber of Business||Chamber of Enterprise||Chamber of Industry|
|Chamber of Trade||Chamber of Training||Charitable||Charity|
|Chartered||Chartered Accountant||Chartered Secretary||Chartered Surveyor|
|Child Maintenance||Child Support||Comhairle||Coimisean|
|Comisiwn||Comisiwn Cynulliad Cenedlaethol Cymru||Commission||Community Benefit Society|
|Comptroller And Auditor General||Comptroller And Auditor General for
|Cynulliad Cenedlaethol Cymru|
|E||Ei Fawrhydi||Ei Mawrhydi||England||of England|
|F||Federation||Financial Conduct Authority||Financial Reporting Council||Financial Reporting Review Panel|
|G||Government||The Governor And Company
of the Bank of England
|H||Health And Safety Executive||Health And Social Care Board||Health Centre||Health Service|
|Health Visitor||His Majesty||Her Majesty||House of Commons|
|House of Lords||HPSS||HSC|
|N||National Assembly for Wales||National Assembly for Wales
|National Audit Office||NHS|
|Northern Ireland||Northern Irish||Northern Ireland Assembly||Northern Ireland Assembly Commission|
|Northern Ireland Executive||Northern Ireland Audit Office||Nurse||Nursing|
|O||Office for Nuclear Regulation||Oifis sgrùdaidh||Oilthigh||Ombudsman|
|Patent||Patentee||(the) Pensions Advisory Service||Police|
|Princess||Prionnsa||Bana-phrionnsa||Prudential Regulation Authority|
|Prydain||Prydeinig||Public Health Agency|
|R||Reassurance||Reassurer||Regional Agency for Public Health And
|Regional Health And Social Care Board|
|Reinsurer||Riaghaltas||Rìgh Banrigh||Rìoghachd Aonaichte|
|S||Scotland||of Scotland||Scottish||Scottish Law Commission|
|Scottish Parliament||Scottish Parliamentary Corporate Body||Senedd||Sheffield|
|Siambr Fasnach||Social Service||Society||Special School|
|Standards||Stock exchange||Swyddfa Archwilio Cymru|
|T||Teyrnas Gyfunol||Teyrnas Unedig||Trade Union||Tribunal|
|W||Wales||Welsh||Wales Audit Office||Welsh Government|
|Welsh Assembly Government||Windsor|
Words that can imply a connection with a government department
Click here to find out how to appeal to make use of these words and phrases.
|A||Accounting Council||Actuarial Council||Audit and Assurance Council||Agency|
|B||Border Agency||Border Force|
|C||Cabinet Office||Cadw||Care and Social Services Inspectorate
|Corporate Reporting Council||Crime Squad||Criminal Intelligence Service||Crown Estate|
|H||Higher Education||HMRC||Home Office|
|I||Industrial and Provident Society||Intellectual Property||IPO|
|N||Notary||Notary public||Notarial||Nuclear Installation|
|O||Office of the Public
|R||Registered Society||Revenue and Customs|
|S||Scrivener||Scrivener notary||SE||Secondary Education|
|Select Committee||Serious Organised Crime||SOCA|
Other regulated words and expressions when naming your company
Click here to find out how to appeal to make use of these words and phrases.
|B||Bachelor of medicine||Building Society|
|C||Chemist||Chiropractic||Chiropractic physician||Chiropractic practitioner|
|Contact lens||Contact lenses||Credit Union|
|D||Dispensing chemist||Dispensing druggist||Dispensing optician||Doctor of medicine|
|F||Faster, higher, stronger||Fortius|
|G||General practitioner||Geneva Cross|
|H||Health Care professions
and protected titles
|Pharmaceutical chemist||Pharmaceutical druggist||Pharmaceutist||Pharmacist|
|R||Red Crescent||Red Cross||Red Lion and Sun||Registered optician|
|S||Social worker||Solicitor||Spirit in motion||Surgeon|
|S||Vet||Veterinary||Veterinary practitioner||Veterinary surgeon|