If you want to set up a limited company in 2023, here are ten essential things you need to know in advance.
There are several ways to set up a limited company
There are three main ways to form your company:
- Directly via Companies House, the registrar of companies.
- Via a formations agent, who will submit your application for you.
- Via another third party, such as an accountant, who will also process your application.
It’s surprisingly inexpensive, but the costs do vary
The costs vary; Companies House charges a fixed £12 fee if you apply online, or £40 if you do so via post.
Our friends at 1st Formations can form your company for just £12.99. if you’d rather not apply on your own. They will check your details for any errors, and answer any questions you may have.
Most accountants will set up a company for you. They will charge a one-off fee, or do it for free if you also sign up as a client.
Here are ten essential details you will need to know in advance of your application, whichever incorporation method you use:
1. Name your company
Your first order of business before kickstarting the company registration process is to come up with a name.
This will be how your company will be referred to on your incorporation paperwork, tax returns, invoices, and other official documents, so it’s critical to spend some time choosing the right one.
You won’t be surprised to hear that Companies House has strict rules you’ll need to follow when naming your business.
Your registered name:
- Can’t be the same or too similar to another company’s name. You can check whether a name is available on Companies House’s company name availability checker
- Can’t be offensive or use ‘sensitive’ words without permission. Sensitive words include ‘accredited’, ‘assurance’, ‘co-operative’ and other words that, if used inappropriately, might give the impression that your business is something it isn’t
- Can’t be the same as a registered trademark
- Must include the word ‘limited’ or ‘ltd’
2. Decide whether to use a trading name
Alongside your company’s registered name, you can also use a trading name — the name your clients will know you by.
So, for example, your registered name could be Superior IT Solutions Ltd, but your clients could know your business as Genius IT Brain On Call.
That said, this is completely optional. Many businesses trade using only their registered name.
If you decide to use a trading name alongside your registered name, there are rules you’ll need to follow.
In particular, your trading name can’t:
- Be the same as an existing trademark
- Contain a ‘sensitive’ word without permission
- Include the words ‘limited’, ‘ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’, or ‘plc’
If you decide to use a trading name, both it and your registered name must appear on invoices, contracts, and other official company paperwork.
To use our previous example, if you trade as Genius IT Brain On Call but your company is registered as Superior IT Solutions Ltd, you should state on invoices, contracts, and other official paperwork that ‘Genius IT Brain On Call is a trading name of Superior IT Solutions Ltd’. Or words to that effect.
3. Choose your registered address
The second most important order of business is choosing your registered address. This is where Companies’ House, HMRC, the pensions regulator, and other authorities will mail official correspondence.
The simplest option is to use your office address or, if you work from home, your home address.
Alternatively, many contractor accountants and third-party providers offer registered office services, either as part of their standard accounting packages or as a standalone service.
The one thing to keep in mind when choosing your registered address is that it must be located in the same country your company’s registered in. So, if you’re registered in England and Wales, your company’s registered address must be in England or Wales.
Similarly, if you’re registered in Scotland or Northern Ireland, your registered address must be within the territory of that country.
4. Appoint company directors
By law, every company must have at least one director, but you may choose to appoint more than one.
Directors can be either individuals or limited companies. That said, at least one director has to be an individual. So, if your company will only have a single director, that director can’t be a company.
Many contractors who work through a limited company appoint themselves as their company’s sole director.
You’ll need to provide Companies House with a list of all the company’s directors, their nationalities, dates of birth, and addresses. If you’re not comfortable sharing home addresses, you can use a service address. This can be the same as your company’s registered address.
In the past, you also had to appoint somebody to act as company secretary, but this is no longer a requirement.
5. Understand your duties as a director
Being a company director comes with serious responsibilities. The Companies Act 2006 — the UK’s company law — sets out seven key duties:
- To run the company in accordance with the rules set out in its memorandum and articles of association (more on these in a few paragraphs)
- To act in the company’s best interests
- To exercise independent judgement and not be unduly influenced by others (though you can — and should — get advice when this makes sense)
- To do your best
- To avoid conflicts of interest, that is situations where your personal loyalties are at odds with what’s best for the company. An example of a conflict of interest would be owning shares in two different companies that compete for the same clients
- To decline gifts or benefits from third parties that could create a conflict of interest. If you accept a supplier’s offer to pay for you to holiday at a five-star tropical resort, for instance, you might feel obligated to give them work even though they might not be the best people for the job
- To tell the other directors of any situations where you’ll benefit personally from a business transaction. An example of this would be if the company operates out of your premises and paying you rent
- To act professionally and ethically
If you fail in any of these duties, you risk getting banned from being a company director for up to 15 years. And if what you’ve done is especially serious, you could also get fined or go to prison.
6. Work out the company’s share structure
Shares represent your ownership stake in the company. The number of shares you have determines:
- How big of a say you have in the company’s decision-making
- The slice of company profits you’re entitled to
- How much of your own money you’ll lose should the company go bust. This will depend on how much your shares are worth. So, if your shares are worth £100, for instance, you’ll be on the hook for £100 if things go wrong
You can split your company’s shareholding in three main ways.
The simplest arrangement possible is one in which you’re the only shareholder. This means you’re the company’s sole owner and entitled to 100% of the profits, and it makes sense if you’re going to be the only one working in the business.
Alternatively, you could split the shares between you and your business partners or you and your spouse.
Here, dividends — the profits from the company — are distributed in proportion to each shareholder’s holding. So if you want to distribute a dividend of £10,000 and you have four shareholders each owning 25% of the shares, for instance, each shareholder will get £2,500.
Making your spouse a shareholder can make sense even if they’re not involved in the business, because it can enable you to get paid more tax-efficiently.
If your spouse pays tax at a lower rate than you do, for example because they earn less than you or don’t work, splitting the dividend means you pay tax on part of it at a lower rate than you would if you took it all out yourself.
For this technique to be legal:
- You must be married and living together
- The shares must be ordinary shares. In other words, they give your spouse the same rights and responsibilities as you
The third way to split your shareholding is to create different classes of shares, each giving their holder a specific set of rights. There are three main types of shares:
- Ordinary shares, which we’ve just touched on. These are the most common type of shares and they give the holder all the rights and responsibilities of a typical shareholder
- Preference shares. These usually give the holders special benefits, such as a higher percentage of the company’s profits, but exclude them from having a say in decision-making. They can be useful if you want to raise capital without giving away control of your business
- Management shares. These give the holders more power, such as greater voting rights
It’s worth having a chat with a good contractor accountant, so they can advise you on the best share structure for your business.
Whatever you decide, you’ll need to provide Companies House with each shareholder’s:
- How many shares they’ll own
- The share class
- Three other pieces of personal information. These could be their passport number, their national insurance number, the last three digits of their phone number, or some other piece of personal information
You’ll also need to keep a record of people who have ‘significant control’. This is anyone who owns more than 25% of the shares or voting rights.
You’ll need to update the information every year by filing a confirmation statement. The confirmation statement is due even if this information hasn’t changed.
7. Set out how your company will be run
Limited companies are governed by two key documents:
- The memorandum of association
- The articles of association
The memorandum of association establishes the company and sets out its objectives and purpose. It contains:
- A declaration of the shareholders’ intention to form a company. The shareholders are usually referred to as ‘subscribers’
- The company’s name and registered address
- A list of the shareholders
- The number of shares the company has issued, how much they’re worth, and how many more shares the company can issue
- The nature of the company’s business
You can download a template memorandum from the government’s website, but there’s no need to file it if you register your company online. Instead, you can simply enter the details of each shareholder. Once you’re done, ticking a checkbox confirms you’ve authenticated the memorandum in the prescribed form.
The articles of association
These are the company’s bylaws, and they set out detailed rules for every aspect of running the company — from what powers the directors have, to how voting takes place, and how dividends are distributed.
Most contractors use the government’s model articles of association — a generic document that fits most standard companies. But you’re free to use your own amended articles if you prefer.
The catch is that, if you use amended articles, you won’t be able to register your company online. You’ll need to fill out Form IN01 and send everything to Companies’ House by post.
8. Choose a SIC code
SIC codes — SIC stands for standard industrial classification — are a system of numbered codes.
Every industry and trade has one or more unique SIC codes assigned to it, and government authorities use them to group similar businesses together for statistical purposes.
In most cases, one SIC code is enough to accurately describe what your company does, but you can choose up to four. As a contractor, the following codes, taken from section J of the full list, are likely to be the most relevant to your business:
|62012||Business and domestic software development|
|62020||Information technology consultancy activities|
|62030||Computer facilities management activities|
|62090||Other information technology service activities|
|63110||Data processing, hosting and related activities|
If you pick the wrong code by mistake or pivot your business, you can change it by filing a confirmation statement.
There’s no need to do this straight away. You can file the confirmation statement with the new SIC code on the date it’s due.
9. Don’t forget to take care of other formalities
Setting up a limited company has many moving parts. Alongside registering with Companies House, you’ll also need to register for:
To register for corporation tax, set up a Government Gateway account. You’ll need your UTR — unique taxpayer reference — to do this. HMRC should send it to you within 14 days of registering your company.
Once you’re logged in, choose ‘Add a tax to your account’ then corporation tax and fill out your company’s registration number and the date you started doing business. You have up to three months from the date you registered your company to register for corporation tax.
You’ll need to register for PAYE in order to pay out your salary and the salary of any other employees.
First, register as an employer. You’ll need to do this even if you’re the only person who’ll be working through the limited company.
Next, log on using your Government Gateway account, click ‘add a tax to your account’, then ‘PAYE for employers’.
As an employer, you’re obliged to take part in automatic enrolment. This entails setting up a workplace pension, deducting contributions from staff’s salaries, and making the minimum employer contributions set out by law.
These rules apply even if you’re your company’s only employee, and you risk a fine if you don’t do it.
That said, if you’re the sole director and employee — or there is more than one director but no employees — you can apply for an exemption.
The advantage of this is that you won’t have to take part in automatic enrolment but still be able to set up a pension of your choosing.
We’ve written about the benefits of doing this in more detail here.
While you don’t need to register your company for VAT straight away — the current threshold is a turnover of £85,000 in the last 12 months — it’s worth keeping it in mind.
The requirement to register for VAT kicks in as soon as you know that your turnover will go over the threshold within the next 30 days. So keep an eye out on your income to make sure you’re not caught out.
10. It’s worth getting expert advice
While you can register a limited company yourself online, it’s a good idea to speak to an accountant, especially if there are going to be several directors or a complex shareholding structure.
A good contractor accountant can advise you on the best way to set up your company and take care of the registration and setup formalities, so nothing falls through the cracks.
More importantly, they’ll help you make sure you operate as tax-efficiently as possible, keep your books in order, and stay on HMRC’s good side.
Do bear in mind though, that the costs can vary. See the table below for some examples:
|Aardvark Accounting||£76||Free company formation + FreeAgent.|
|Clever Accounts||£89.50||Free company formation + IR35 FLEX solution – for any contract.|
|SG Accounting||£109||Free company formation + free tax return.|
|InTouch||£105||Free company formation. Easily switch between ltd and umbrella.|
|You can compare the monthly fees of over 30 accountants here.|
Some contractor accountants include company registration services in their monthly packages. Others will charge a one-off fee plus Companies House’s registration fee (£12 if you file online and £40 if you file by post).
Our trusted partners 1st Formations will give you tailor-made advice and help you set up and register your company for just £12.99.
Alternatively check out our comprehensive list of 30+ contractor accountants to compare fees and costs, as well as the ongoing accounting services for contractors which they offer.
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