5 things you need to form a limited company

Setting up your own limited company (‘Ltd’) is not a step to take lightly.

There are important decisions you need to make before you even start the legal process of establishing your own, separate legal entity, to ‘do’ business.

And, writes Chris James, head of limited company accounting at Workwell, these are five things you absolutely need to form a limited company.

1. Business plan

There are costs to setting up and running a limited company.

The actual formation of your new company is only a minimal outlay, and many accountants will look at rolling that cost into your monthly or annual fee, should you form a company with their assistance.

But it is you alone who is committing to taking responsibility for compliance on an ongoing basis. 

If you set up a company and no longer need it, you will have to get it closed down. If you keep it open, you will have recurring tasks and deadlines that you’ll have to sort out. Remember here, a good accountant can help you, but won’t work for free. 

So it’s vital that taking this step of forming a company to execute your business plan makes business sense; otherwise you shouldn’t be doing it.

When you think you’re ready, go back and double-check you’ve balanced the benefits – the credibility and personal protection that only the limited company structure can offer, for example, against what you’ll be spending, now and in the future.

2. A permitted limited company name

When you form a company it has to have a legal name, and you need to decide what that name will be.

Your company name cannot be identical or too close to an existing name (and you can get into legal difficulties if it looks like you’re trying to benefit from someone else’s good name).

Also, the name shouldn’t confuse people! Further be aware that there are also restricted words that Companies House will normally prevent you from putting in a name, like ‘Royal’ or other words that might mislead the public. There is a name checker at Companies House that checks the availability of names against existing ones, but beware -- it doesn’t check for restricted words.

Finally, do remember that if your company has a particular name, but you want to ‘trade as’ something else, then you can, provided you put both names on legal documents. 

3. Registered office

A limited company has to have a registered office, a place where documents can be delivered and where the statutory records of the company can be examined (bearing in mind modern data-holding conventions).

Some accountants offer their own address as a possible registered office when would-be directors want to keep their personal /home address private. 

We ‘d point out that the actual volume of post which arrives addressed to a company is much reduced nowadays, so fortunately any fee you’ll pay for this service from your accountant is likely to be small. 

If you do use your own home address and are renting the property, make sure that there is no restriction in your letting agreement around running a business from there, or consider discussing this with the landlord. Oh, an PO Boxes are not permitted!

4. Directors / Officers

The roles of company secretary and director are collectively known as ‘officers.’ 

These days, the position of company secretary in a small company is virtually redundant, and many companies do not have one. 

If a family member carries out administrative work for the business, it may be appropriate to formally appoint them as company secretary, but that role does have some limited legal responsibilities, and they could just be employed as an administrator and fulfil the same function.

A company director, on the other hand, holds all of the legal responsibilities for ensuring the company operates in compliance with the Companies Act. If things go wrong, such as continuing to trade through a company when it has become insolvent, then the director is the person who will face the most serious consequences.

More positively, the officers of a limited company can be paid a salary, provided the amount is commercially reasonable.

Please consider that if the officers are from overseas, delays in getting a company bank account, registering for VAT and other taxes, plus sorting other matters, will likely occur. So allow time for this if it’s relevant to your situation.

5. Shareholders

The shareholders are the owners of the business. And because they own shares, they are able to receive dividends (being a director does not entitle you to dividends).

It is common in small businesses and in contracting that the director and shareholder is the same person, and that person may also be doing some or all of the work that the company delivers. But this doesn’t have to be the case – for most bigger businesses, the shareholders and directors will be separate groups of people. 

For a contractor though, the main choice tends to be whether a spouse or other family member will be involved in the business, as an officer or shareholder. Sometimes a spouse may be able to utilise their own tax bands to lower the household tax burden but beware, frequent shareholder changes can attract unwanted attention -- so it’s best to get things set up properly at the start. 

Also remember that although transfers of shares to a spouse are normally without tax implications, a marriage or civil partnership not registered in the UK will normally not count for tax purposes, so if you get hitched overseas, do your paperwork when you get back!