Choosing the right structure for your startup is one of the key early decisions anyone going into business must make. There are three main options: a limited company, being self employed or creating a partnership.
Other articles in the Startup series focus on becoming a sole trader and setting up a partnership so here we focus on what’s involved in going down the limited company route, including its pros and cons.
Unlike a sole trader’s business a limited company must have a name. A bit like naming a baby it can take a while to find one that feels right. Ideally it will be distinctive and project what the company does in a memorable way. But, unlike naming your offspring, you can’t use a name that has already been used and you may run into trade mark issues if it is too similar to an existing name, so no Tesko or Clerks Shoes if you are thinking of going into retailing.
You also must not adopt a name that implies or suggests the company is anything other than a limited company or that it is linked to any branch of the government without permission.
Fortunately, Companies House has a name availability checker to help you narrow down your shortlist.
The company must have an address registered with Companies House so it and HMRC know where to find you, which doesn’t have to be your trading address. You probably won’t be able to use a rental residential address for this because of conditions in your tenancy agreement.
By law a limited company must have at least one director, who will usually be the founder. Your name and address will thus be displayed on the Companies House website although you can ask for the latter not to be included on the register.
The director is responsible for making sure the company pays its taxes and is legally compliant.
The company must also have at least one shareholder or ‘guarantor’, who again would usually be the founder, so the shareholder and director can be one and the same person. If the company is a not-for-profit it will have a guarantor rather than a shareholder, the limited by guarantee structure providing the same protection from personal liability that directors have.
If you have multiple shareholders their shares will give them a say in how the business is run, so make sure you hang on to at least half of issued shares.
There are some important documents that you must create as part of forming a company.
The memorandum of association (MoA) sets out the purpose of the company, how it will be run and the responsibilities of the directors. Companies House provides a template MoA.
You must record the minutes from the company’s first meeting of the directors. Even if you are the sole director and have the boardroom all to yourself you must still do this, even though it may seem rather odd. The reason is that the minutes are needed to show that the company directors have been properly appointed.
Share certificates are needed to show how much of the company each shareholder owns. A new share certificate should be issued each time new shares are issued or if there are any ownership changes.
All companies need a Standard Industrial Classification (SIC). There are different codes for different industries and sectors and you choose the code that is appropriate for your business. The government uses the SIC codes to keep track of how many businesses are being created in each industry.
You will need the SIC code to register with Companies House, along with your official address for correspondence. You can register for corporation tax at the same time or within three months of starting trading. Registration is a very affordable £50 or you can ask a formation agent to do it for you for a modest sum.
You and the company are separate legal entities and must keep their finances separate. Business bank accounts usually have monthly fees but many banks offer free or low cost introductory periods so do shop around.
The process is a little more complicated than opening a current account so allow extra time for this. You will need your Companies House registration number first.
You must register for corporation tax with HMRC and for VAT if turnover is more than £90,000 in any 12-month period or is going to exceed this amount within the next 30 days.
The corporation tax rate is 19% on profits for smaller companies.
Ideally you will be growing quickly and hiring staff but before your first payday you must register with HMRC as an employer. HMRC will then send you your employer PAYE reference number.
Becoming an employer is a big step and creates legal obligations. You have to comply with minimum wage regulations, set up a pension scheme and pay national insurance. If you have fewer than 10 employees you can use HMRC’s free Basic PAYE Tools payment software, which will perform most payroll tasks for you.
Employers’ liability insurance is a legal requirement if you have workers. This will cover compensation claims against you if any workers become ill or injured due to the work they do for you.
Public liability insurance covers legal costs if someone makes a claim against you relating to an injury or damage to their property caused by your business activities.
You might also consider professional indemnity insurance that protects you against negligence claims by customers or clients, and income protection insurance that will provide you with an income if you cannot work due to injury or illness.
Directors who don’t keep proper accounting records can be fined £3,000 and even disqualified. As well as having an accountant to make sure your filings to HMRC and Companies House are all in order it is worth getting yourself an accounting software package.
If you have staff, you can take advantage of HMRC-compatible payroll software, some of which is free.
Companies that pay VAT have to be part of HMRC’s making tax digital (MTD) programme. This requires them to use HMRC-compatible software, file quarterly updates and make an annual tax declaration. HMRC has put self-employed people and landlords on a pathway to full adoption of MTD but thus far not non-VAT-registered companies.
Limited companies have certain tax advantages over sole traders, which for many people make the structure more appealing.
Being able to take pay as dividends, which are taxed at a lower rate than income tax.
Limited liability, which means your personal assets can’t be used to pay company debts.
Lower level of corporation tax relative to income tax.
If you have decided the limited company route is the one for you and would like more bespoke advice about your business plans or to take advantage of our accountancy services, please contact Finsbury Robinson.
We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team are available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk
Angus Walker 01/11/2025
