When starting a business, a large number of people go down the route of forming a limited company or, to give it its full title, a limited liability company.
The alternative for someone starting up in business on their own is to trade as a sole-trader. There is less formal paperwork involved in going into business as a sole-trader, but a limited company can offer a number of advantages. These include greater opportunities to reduce the amount of tax your business pays, and increased protection of your personal assets in the event of the business running into problems.
This article explains how a limited company is structured, and details the steps you need to take to form your own limited company.
The first thing you will need to do is to decide on a name for your new limited company. Companies House maintains a list of all companies registered in the UK, and you can use their website to check if the name you want is available or whether it is already in use by another company.
Whatever name you opt for will have to have the word "limited" (often abbreviated to Ltd) at the end. So if, for example, your wanted to call your new business "The Ultimate Widget Company" then the full name of your limited company would be The Ultimate Widget Company Limited or The Ultimate Widget Company Ltd.
Your new company will need at least two people to act as officers of the company. One of these people will be the company secretary. The other person will be a director of the company. If you wish, the company secretary can be a director as well, but he/she cannot be the sole director.
The company secretary has certain legal responsibilities such as ensuring that the company submits annual returns to Companies House and that the company and its directors operate within the law.
Many people going into business on their own choose their spouse or another family member to fulfil the role of company secretary. Where two or more people are forming a limited company, one of them will often take on the job of company secretary in addition to being one of the directors of the company.
An alternative is to use the services of a third party firm who provide company secretary services to your business in return for an annual fee.
The next thing to decide is how you will allocate shares in your new company. You will need to specify how many shares your company has and the value of them. Typically, companies are formed with 100 or 1000 shares with a value of £1 per share.
Some or all of these shares are then issued to the shareholders in return for the appropriate sum of money. Ownership of shares gives the shareholders the right to vote at company meetings and entitles them to be paid dividends on their shares based on the profits of the company.
Any shares which remain unsold are known as unallocated shares.
It is a good idea to seek advice from an accountant at this point, in order to make sure that the allocation of shares is done in the most tax efficient way for your own particular circumstances.
The final decision to make before forming your limited company involves the company's registered office. Under Company Law, all companies are required to have a registered office.
The registered office of a company is the address where official documents can be served and where certain statutory documents relating to the company are kept and can be made available for inspection.
Common choices for the registered office address are either the home address of one of the directors of the company, or the office of the company's accountants.
Having made all these decisions, you now have all the information you need to form your limited company.
The quickest and cheapest way to form a company is using one of the many online company formation services. For a fee of around £30 to £50 they will process your application with Companies House and send you all the required company documents by email for you to print out. For an additional fee, they will normally provide printed copies of the documents if you wish, but for most people this is not considered necessary.
An alternative to forming the company from scratch yourself is to buy what is known as an "off the shelf company".
Off the shelf companies are companies which have been formed already by a company formation agent, but which have not yet traded. You pay a fee to the formation agent and they then transfer ownership of the ready-formed company to you.
Obviously, with an off the shelf company you are restricted on your choice of name for your company, as you can only pick from the list of pre-formed off the shelf companies that the formation agent has available at that time. However, once you have bought your company you can apply via Companies House to change its name, but there is a fee for this.
As off the shelf companies tend to work out more expensive and less flexible than forming the company yourself, it makes sense in the majority of cases to form the company yourself using one of the online formation services.
Copyright 2005 David Miles. You are welcome to reproduce this article on your website, so long as it is published "as is" (unedited) and with the author's bio paragraph (resource box) and copyright information included. In addition, all links to external websites must be left in place.
David Miles is the editor of a number of business and finance websites including The Cash Clinic - a UK Personal Finance Portal.