Setting up a limited company

Are you thinking of turning your business into a limited company? Here’s everything you need to know about the pros and cons of forming a limited company and how to register your business.

New businesses typically fall into one of three types: sole trader, partnership, or limited company.

Each has its advantages, but if you want to grow your business significantly, shield personal assets from liabilities and employ staff, then forming a limited company is generally the best option.

You’ll be in good company, as over 801,000 limited companies were opened in the UK in 2023.

In this guide, we’ll cover how to set up a limited company, the differences between private and public limited companies and much more.

It’s a good idea to seek independent legal advice to ensure that setting up a limited company is right for you and your circumstances.

Setting up a limited company – why go limited?

Registering and running a limited company can generally involve more paperwork and accounting than a sole trader business or partnership, but it could be worth it considering the extra protection from financial liabilities.

A limited company’s liability is just that: limited.

Because they are separate legal entities, limited companies can own property and assets, incur debts and sue or be sued, but their finances are completely separate from the personal finances of the owners.

This means that should the business fail, neither you nor the other owners can be held responsible for any of its debts (unless there has been some previous agreement to personally guarantee the liabilities of the business or financial mismanagement such as fraud).

Unlike sole traders or business partnerships, a limited company could be an excellent way to run a business with less risk to personal finances or assets.

Ownership of a limited company is divided into shares, which are then allocated to each shareholder.

How many shares do I need to issue?

A share represents partial ownership in a business, entitling the holder to financial dividends.

Shares can be separated into different classes with different rights (voting or non-voting), and one shareholder can hold multiple shares.

A limited company must issue at least one share during the incorporation process, and the number of shares it can issue is unlimited.

The initial allocation of shares effectively determines the percentage each shareholder owns of the new business.

For example, if two people founded a company and issued themselves 50 shares each at the point of incorporation, the company would have issued 100 shares overall, with each person having received 50% of the total shares – equal to owning half the company each.

You can determine the number of shares allocated at the point of incorporation – and there’s no limit or formula to follow.

Typically, however, a single owner might issue themselves a single share or a set number, such as 100 shares.

Multiple owners, such as joint founders, might agree on a total number of shares – such as 100 – and divide the number equally between them.

What are the advantages of setting up a limited company?

The advantages of setting up a limited company include:

• liabilities such as debts or legal action are limited to the company, meaning you may be generally protected from going personally bankrupt in the event the business fails
• if you plan to employ staff, it could be better to form a limited company and pay salaries via the Pay As You Earn (PAYE) scheme
• corporation tax on profits is lower than the higher rates of income tax that a sole trader will pay on equivalent profits in 2024, making incorporation potentially more tax-efficient for businesses with higher profits
• as its own legal entity, it could be easier to sell the business later or to issue shares to raise capital
• a limited company could be perceived as a bigger, more professional organisation, which may be important if your clients are primarily other businesses or government organisations.

Can I form a limited company with just one person?

It is possible to start a limited company with just one person and act as the sole director and only shareholder.

This is known as a ‘single member’ company.

You’ll need to choose a unique company name, register the company with Companies House, and follow the rules for running and managing a company, including filing annual accounts and a confirmation statement, as well as paying corporation tax on any profits.

Check if setting up a limited company is right for you

When starting a new business, you need to decide on its legal structure.

It could be one of the following:

Sole trader (an individual running their own business)

A sole trader is the simplest business form but comes with personal liability for business debts.

Partnership (shared business ownership)

Partnerships share profits and liabilities among partners.

Social enterprise or charity

These options primarily focus on social impact, putting community benefits over profits.

There isn’t a specific legal form for a social enterprise, so it can take various business structures depending on their needs and missions.

Charitable incorporated organisations (CIOs) and charitable companies are limited by guarantee and offer limited liability protection.

Limited company (a separate legal entity owned by shareholders)

Limited companies offer protection of personal assets but require more paperwork and public disclosure.

When creating a limited company, choosing a Standard Industrial Classification (SIC) code is a crucial step.

This code classifies the principal business activity, which helps with industry comparisons and statistical analyses.

What is the difference between a private and public limited company?

A limited company could be either public (PLC) or private (Limited), with the key differences between the two being:

• public limited companies must have a minimum of £50,000 of share capital, while there is no minimum for a private limited company
• private limited companies can have just one shareholder who is also the director – there is no maximum number of shareholders, but private limited company shares can’t be traded publicly on the stock market
• public limited companies must file accounts within six months of the accounting year (nine months for private) for the first financial year
• public limited companies need to hold Annual General Meetings (AGMs), must acquire a trading certificate before trading, and must have a suitably qualified company secretary.

Legal requirements for limited companies

Limited companies must have at least one director to run the business.

Company directors are legally required to:

• file an annual confirmation statement with Companies House to confirm any changes in the details of directors, the registered office, the share capital, and shareholdings (or that there have been no changes, to ensure Companies House’s records are up to date)
• submit your company’s annual accounts to Companies House
• submit an annual corporation tax return to HM Revenue and Customs (HMRC) so corporation tax can be calculated and paid within nine months of the company’s accounting year-end
• if your business turnover exceeds the VAT threshold (£90,000 as of 2024 – this can change every tax year), your company must be registered for VAT, and quarterly VAT returns must be completed online
• all company employees, including directors, must pay income tax and Class 1 National Insurance Contributions – so if you operate the company payroll yourself, you must report employees’ payments and deductions to HMRC on or before each payday and then pay what you owe to HMRC monthly.

How do I start setting up a limited company?

There are several steps involved in forming a limited company, including deciding whether to register the business yourself or use a specialist formation company.

You must also decide on the company officers, choose a company name, and file registration documents with Companies House.

Do I need a business bank account?

Although it is not a legal requirement, opening a separate business account to handle your company’s finances could be beneficial.

There are several benefits associated with this, which include:

• better financial organisation
• building credit
• legal protection
• taking advantage of additional services that could help your business.

Read our complete guide to business banking.

1. Choose a business name

Before registering as a limited company, you’ll need to decide on its name.

The new company cannot have the same name as another registered company in the UK or be too similar, as this could result in a legal dispute.

It’s a good idea to search the Companies House register for any company with the same name or do a Google search for similar names to the one you’re considering.

You can also search the Intellectual Property Office to check if a name is registered as a UK trademark.

You could also consider ensuring that any web domain you would like to use is available and securing it before registering as a limited company.

Some rules restrict the types of names you can use for your business – check the government guide to the rules on choosing a company name.

As a limited company, your name must end in either ‘Ltd’ or ‘Limited’.

2. Choose company officers

All limited companies must always have at least one company director responsible for the business.

Private limited companies need to have at least one company director (usually the person starting and running the limited company), while public limited companies that have publicly traded shares need at least two directors and a company secretary.

For private companies, having a company secretary is optional.

Company directors manage the company in accordance with the law and its articles of association (the company’s rule book).

They are responsible for ensuring annual accounts and confirmation statements plus registered information change notices are received by Companies House within the required period.

You cannot be a company director if you are an undischarged bankrupt, have been disqualified by a court from holding a directorship, or are under 16 years old.

Company secretaries are responsible for maintaining statutory registers, keeping minutes of board meetings, and ensuring all statutory filings are completed.

They are typically professionally qualified accountants, barristers, solicitors, or advocates.

3. Choose a registered office and director service address

You’ll need to choose an address as the company’s registered office.

This must be a physical address in the relevant part of the UK (an English company must have a registered office in England).

This address will be made public and is used, among other things, by Companies House and HMRC to send official documents or legal notices to the company.

Anyone who wants to contact your company should use this address, meaning your registered address needs to be checked regularly for any post.

Limited companies can use a registered office address service offered by agents.

Read our guide to registered office addresses.

When the company is incorporated and whenever more directors are appointed, each director has to state their residential address (this information remains private).

However, they also have to give a service address which is made public – this could be their residential address (if they wish), or it could be the company’s registered office.

4. Choose how to register a limited company

You could register your limited company with Companies House yourself by simply completing several documents.

Alternatively, you could also pay an agent to register your business for you, which could be quicker and reduce the risk of mistakes.

Register a limited company yourself

To register a limited company yourself, you apply online directly to Companies House.

You’ll need to choose a company name, provide an address, provide details of the company’s directors and shareholders, and provide an SIC code to describe what your company does.

It costs£50 to register online, and the process typically takes 24 hours.

Once registered, you’ll get a ‘Certificate of Incorporation’.

This confirms that the company legally exists and shows the company’s number and date of formation.

What documents do I need to form a limited company?

Whether you register your limited company personally or through a company formation agent, you will need several registration documents.

These documents need to be submitted to Companies House before you can start trading:

A Memorandum of Association

A short statement, signed by each proposed shareholder, confirming they wish to form the company.

Articles of Association

The company’s constitution states, among other things, shareholders’ rights and the powers of company directors over the business.

Form IN01

The document that sets out all the requisite details of the company, including the company name, the company’s trading activities (with the associated SIC Code from Companies House), registered office, director and company secretary details, share capital details, how shares have been divided, and their ownership.

This can be done online as part of your registration process with Companies House or sent separately by post.

What should I do after registering a limited company?

Once registered as a limited company, you’ll be sent a Certificate of Incorporation confirming the company’s existence and showing the company number and date of formation.

You must now register your limited company with HMRC within three months of starting trading or risk a penalty – HMRC should contact you automatically at your company’s registered office asking you to do so.

When can I start trading with my limited company?

In the UK, a limited company can start trading as soon as it is successfully registered with Companies House.

Once registration is complete and your limited company has been issued a Certificate of Incorporation, you can start business activities immediately.

What records do I need to keep as a limited company?

In the UK, a limited company is required to keep several records, including:

Details of directors, shareholders and company secretaries – Names, addresses, and shareholdings.

Results of shareholder votes and resolutions – Important decisions made by shareholders.

Loan repayment terms and amounts – Details of any loans or finance agreements.

Financial records – Including income, expenses, assets, and liabilities.

Accounting reference date – Your company’s year-end date.

PSC Register – Information on people with significant control over the company (usually people who hold more than 25% of shares or voting rights in a company).

What are your duties as a director of a limited company?

A director of a limited company has several key responsibilities.

These can include ensuring all legal records are kept and organised and that company changes are reported correctly.

It can also include ensuring that accounts and tax returns are filed on time.

You would be responsible for ensuring the company doesn’t trade if its debts cannot be paid (this is known as trading insolvently, which is illegal in the UK) and managing the company in a way that reflects the requirements of all stakeholders.