Guide to Forming a Limited Company

When you are starting a business and are looking to form a company, one of the most popular types of business to create is a Limited Company.  But what is a limited company and what information is needed to form one?  Here at Your Virtual Office, our guide to forming a limited company can help you to gather together the necessary information and we can even take over the process for you to save you a lot of time, effort and worry about doing things right.

 

What is a Limited Company?

A Limited Company is a registered organisation for your business and is responsible in its own right for everything that it does as well as its own finances, meaning that all transactions are kept separate from the personal finances of the person or persons who founded it.  Profits made by this business are owned by the company itself, not the individual who owns or runs it, and it is responsible for paying Corporation Taxes on it’s profits before any proceeds can be split among those involves with it.

A limited company has members – these are either people or organisations who own shares in the company.  It also has directors, the people who are responsible for the day to day running of the company.  Directors can also own shares but aren’t required to in order to be a director.

 

Types of limited company

There are a number of types of limited company that have slightly different formation processes.  The most common is called ‘limited by shares’.  What this means is that shareholders responsibility for financial liabilities of the company are limited by the value of the shares that they own in. Shareholders will not have their own personal finances or property put at risk should the company get into financial difficulties.

An example would be a company that issues 100 shares at £1 each.  Two shareholders have 50 shares each and have paid in full.  If the company fails, the most these two shareholders would have to pay towards any outstanding debts would be £50 each as this is the value of the shares they purchased. In addition, company directors are not held personally responsible for any debts that the company builds up and don’t have to pay back any company debts as long as they have done nothing illegal.

Another type of limited company is a ‘private company limited by guarantee’.  This is normally used by not for profit companies such as sports clubs, schools, charitable organisations, fund raising organisations and community groups. This is where the members would financially back the company with a small nominal amount of money that would go towards paying off the debts should the company fail. Members would contribute on the knowledge that they wouldn’t expect to see any returns on their investment. All profits made by the company would be reinvested back into it and used in its upkeep.

Finally, a public limited company is a company trading on the London Stock Exchange or similar public market. Shares would be open for purchase by the public with the aim of making a profit.

 

Why opt for a limited company?

One of the main reasons for deciding to become a limited company rather than any other option is that the liabilities for the owners are restricted.  The sad fact is that businesses do fail, despite the best efforts of those involved.  By creating a limited company, you limit the liability for those involved financially. Knowing that your liabilities are limited in this way can give you great peace of mind should something unexpected happen to the company in the future.

There is also a fantastic confidence boost to be had from forming a limited company. The legal identity of the company gives great prestige to your business dealings. The flexibility of a limited company means that it ensures that those involved with the company can change over time without it impacting on the business. Should the company lose a director through retirement or death, then the company will still be able to carry on trading in its own right.

There are also some tax benefits open to limited companies that are not available to sole traders.

Finally, forming a limited company is quite straightforward, especially when you use a company formation service such as ours.  With our help, you can have your business up and running in as little as four hours during any normal working day once the required information is provided.

 

Forming a limited company

To create a limited company, you need to register your business with Companies House in London.  There are several pieces of information that are required as part of this process.  You can undertake to do this yourself or you can use our Limited Company Formation service.

 

The following information is required to form a limited company:

  • Company name
  • Address for the company
  • One director and one shareholder minimum
  • Memorandum of association
  • Details of the company’s shares and anyone with 25% or more control of the company
  • Articles of association
  • SIC code

 

You will also need a business account to use for the business that is established before the company is formed.  Tax registration is required once the company is formed and a system put in place to record accounts during the year for tax and management purposes.

 

Company name

The name of the company is a little more complicated than it may first sound.  Many people want to call their company after themselves or their location, often wanting to featuring their trade or industry too.  but there are stipulations about company names that you have to be aware of.  These include not naming your business the same or ‘too alike’ to another company.  There are also rules about certain words that cannot be used including ‘royal’ and ‘queen’.  Companies House have a full database of what wording you cannot use in your company name and you can check with their Company Name Checker to see if the name you would like to use is available.

 

Registered Office Address

The registered office address of the business can be where the business is based and where you operate from, your home address or a specific address somewhere else that you have permission to use.  This address will be on the public register at Companies House and fully viewable by the general public, so some people prefer not to use their own home address.

A registered office address service such as the one provided by Your Virtual Office can allow the business to use our address in London as its registered address.

 

Memorandum and articles of association

The memorandum of association is an agreement that all shareholders agree to that is a legally binding statement around the formation of the company.  Likewise, the articles of association are the rules that govern the company and stipulate how the business will operate.  It also includes information about how profits are divided up and what happens if the business is sold.

 

SIC code

The SIC code (Standard industrial classification of economic activities) is provided by Companies House and details the industry that the business will operate in.

 

Company formation process

Once this information is gathered together, the process of forming the company can begin.  Most of this can be done online via the Companies House website, or you can use a company formation process to ensure that the process will be carried out correctly.

Your Virtual Office’s company formation process involves completing an online form via our website where we can collect all the required information needed to form your company.  We will then confirm with you and review all the information to ensure it is correct and accurate.  If you get stuck on anything or are unsure of what information to provide, don’t worry – we are here to help you with some free guidance should you need it. Once the information is verified, we can complete the process of forming your company and provide you with the documents that you will need to keep.  These include:

  • Certificate of incorporation
  • Copies of the memorandum and articles of association
  • Minutes of the first meeting
  • Share transfer paperwork
  • Copies of all the Companies House forms for your records
  • You can then consider any additional services you may require from us including registered office service, mail handling and call answering services.

 

What happens following formation?

Once you are incorporated, you will be required to prepare your statutory financial accounts each year and submit these to Companies House, along with a Confirmation Statement (this used to be called the Annual Return). If your company is trading and not registered as dormant, then you will need to send HMRC your company tax returns and financial accounts. You will be liable to pay the current rate of corporation tax on your taxable profits.