Frequently asked questions - limited company formations
Below is a list of the questions we are asked most frequently about limited company formation. Please read them carefully before proceeding to set up a limited company.
If you have a question that you think should be included in this list, or you would like a free information pack on UK limited company formation, please contact us.
What is a limited company and how is it different from a sole trader?
A UK limited company is a legal creation which is established in law and governed by the Companies Act, passed by Parliament. The process of setting up a limited company is known as company formation, setting up a limited company, registering a limited company or incorporating a limited company. Limited companies are registered at Companies House and given a certificate of incorporation and a number to record the fact. Limited companies are kept on a live database at Companies House. The limited company is a distinct and separate entity form the people who own it and run it, with its own status for taxation, financial and general legal obligations. A limited company is like another person, whereas a sole trader describes a situation where a person runs their own business in their own name or under a trading name, without registering at Companies House, and maintaining liability and responsibility for their affairs in a personal capacity.
Who owns the company and who runs it?
The company is run by the directors and the shareholders (members) own it. Directors are answerable to shareholders and are legally bound to act in their best interests. You only require one member and one director, who can be the same person.
Am I liable for the company's debts?
No. Unless you sign a personal guarantee or trade fraudulently. A limited company is "limited" in the sense that its owners are not liable for its debts. Some people see a limited company as an insurance policy, especially for a new or high-risk business. Many people lose their savings and other assets because they started out without "being limited". You need to assess the risk of your situation.
Are there any disadvantages?
The preparation of annual accounts may cost more than if you were to trade as a sole trader. The public can check up on certain aspects of your business that you may prefer to keep private.
Are there compliance costs?
Companies House charges a small fee that has to be paid when the company's annual return is submitted. Annual accounts will need to be prepared in the appropriate format which will incur accountancy fees. The late delivery of documents to Companies House will be penalised.
What are shares?
Shares are a person's stake in the company. It is a way of describing ownership of their part of the company.
What is share capital?
This is the shares and their value in monetary terms that the company can have at a particular point in time. In simple terms it is the money that has been invested in the business, either at the outset or at a later stage, and is intended to be used to protect the creditors in the event of a failure.
When do I pay for my shares?
Normally the shares can be paid for at a date after they are issued. If they are not paid for when the request for funds is forthcoming the may be taken away by the company . If a company fails and money is owing for shares that have been allotted by the company the shareholder is liable to pay the outstanding money to the creditors.
Which currencies can a share be?
Any currency may be used for a private company.
Who do I sell or give shares to?
The people who own the shares are the owners of the company. So you can let whoever you want become a shareholder but ultimately they are in charge of everything and can sack or appoint directors as they wish. Any money made by the company will belong to them. It is essential that you take professional advice prior to allowing third parties to become shareholders. Once somebody has acquired a share it cannot simply be taken away from them.
Are there different types of shares?
A company may have as many different types of shares as it wishes, all with different conditions attached to them. The most common are ORDINARY , with no special rights or restrictions (by far the most common). PREFERENCE, normally carry a right that any annual dividends available will be paid preferentially on these shares before other classes, CUMULATIVE PREFERENCE, carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years , REDEEMABLE , issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot have redeemable shares only.
Can a company issue bearer shares?
You cannot issue bearer shares.
What if a shareholder refuses to pay for their shares?
If a shareholder refuses to pay money due on a share, the company may use forfeiture proceedings if permitted by its articles. A forfeited share may be sold, re-allotted or otherwise disposed of at the discretion of the directors. Companies House need not be notified of the forfeiture or re-allotment except in the list of members on the company's next annual return. A company cannot use forfeited shares for the purposes of voting.
What are pre-emption rights?
These rights, standard with our companies, are the rights of existing shareholders to be offered new shares by the company prior to the shares being offered for sale elsewhere.
Do I have to trade immediately?
No. Your company can remain dormant (non-trading) for as long as you wish.
Can I use any name?
There are restrictions on what names can be registered. Further details can be found here
What are the set-up costs?
Formations Direct Ltd charge from £54 for an off-the-shelf company, or £104.80 for an own-name company with multiple directors / shareholders that trades. If you buy a ready made company, then you will be able to open a bank account and trade immediately. If you only wish to protect a company name without trading the cost is £34.80. Click here for full options and prices.
What is a registered office?
This is an official home address for the business, where official documents and letters can be delivered. It does not have to be the trading address, and it can be your home or accountant's address. If you would like, you can pay Formations Direct Ltd to be your registered office. It is important that the address is reliable and secure as this is how Companies House and other official bodies will communicate with you.
What is a director's service address?
This is an official home address for the director, where official documents and letters can be delivered. It does not have to be the trading address, but it can be your home or accountant's address. If you would like, you can pay Formations Direct Ltd to be your official address. It is important that the director's service address is reliable and secure as this is how Companies House and other official bodies will communicate with you.
What is Memorandum & Articles (M&A)?
This is the document that governs the running of the company and is a record of the intention of the shareholders to set it up. It is the company's constitution. It is usual to have several copies for giving to banks, solicitors etc
What officers are needed?
The company is required to have a director. Company secretary is an optional position. The director is responsible for the company's business affairs and the secretary (if there is one) usually assists in compliance matters.
What are the running costs?
Costs associated with being a limited company include the small annual fee levied by Companies House and the costs of preparing accounts in the specified format. Taking money out of the company as a wage will have tax implications as the company is separate from its owners and directors. You will probably require accountancy advice to arrange this in the most efficient manner.
What other advantages are there?
Apart from having limited liability, a limited company has the following advantages.
- You can give a share of the business to others, e.g. family
- It may be easier to attract people to invest money in your business.
- Obtaining bank loans may be easier.
- There may be lower tax payments.
- In the event of a partner leaving, or somebody dying, it is easier to continue the business.
- It is easier to sell the business.
- You have a better standing in the public eye.
- It can assist in the protection of a name.
- People have more confidence in your business as they can check up on your company, on the public records, at Companies House.
- Subcontractors and agency workers will find it easier to obtain work.
Will I need an accountant and an audit?
An accountant is not a legal requirement, although it is usually advisable to seek the services of a suitably qualified accountant e.g. Chartered Certified Accountant, as they will prevent you from making costly errors and almost certainly reduce your tax charge. There are statutory thresholds for audits, in practice only applying to companies with several million pounds of turnover. Exact figures can be found at Companies House or by asking your accountant.
Will I need to fill in any forms?
We undertake all form filling to register the company at Companies House. Once it is registered you will need to change/appoint directors and shareholders unless you have made your own appointments from the outset, which we will be happy to assist with at NO extra cost.
How do I take money out of the company?
Directors may receive a wage under PAYE and shareholders (who may also be directors) are entitled to dividends if there is enough profit in the company, subject to the Companies Act. You should take advice from a suitably qualified accountant prior to commencing your financial arrangements as mistakes can be costly in terms of tax.
How do I "go limited"?
We use the easiest and simplest methods of incorporation at Formations Direct Ltd, with free name checks and free after sales service. We will deal with Companies House on your behalf so al you have to do is lift the phone to us on 0800 085 45 05 or order online.
What happens when I am finished with my company?
You can apply to have it struck off or liquidated, depending on the circumstances. You should take professional advice prior to acting to shut down your company.