The biggest advantage of a limited company is limited liability. The company is a separate legal entity (it has its own bank account etc.) so as a company director, you can’t lose more than the face value of your share in the business. This overcomes the main disadvantage of being a sole trader, which is that your individual finances aren’t fully separated from your business finances. This means that if your sole trader business runs into difficulties or is sued, your personal assets are at risk. With a limited company, your personal assets are protected. Another logical reason for setting up a company is that companies pay a lower tax rate on their profits. How to Open a Ltd Company? The formation of a limited company (Ltd) is quite straightforward, but it's critical to know how your legal position, financial arrangements, and other responsibilities will change.
The 7 Steps to setting up a limited company
Here are the key stages involved in forming your company.
1. Check it’s right for you
Make sure a company is the best structure for your business. You can check the pros and cons here.
2. Choose your company name
Your company name must be available (i.e. unique, and not too similar to an existing company). The name must not make false implications (e.g. implies regulation or approval by a body where none exists) and must not be offensive. Note that you can trade under a different name, but you can’t add ‘Ltd’ to this name if it isn’t your registered name.
3. Appoint at least one director
Your company must have at least one director, but it can have several. Directors collectively agree to decisions for the company. They must follow its rules, and have ultimate responsibility for filing the accounts and ensuring the company pays its corporation tax.
You can also appoint a company secretary, though this isn’t compulsory. The company secretary ensures that directors' decisions are carried out, ensures that the company follows regulatory requirements, and handles other company administration duties.
4. Decide who will be shareholders
A company must have at least one shareholder, who can be a director. Shares can be divided among directors (not necessarily evenly). Shareholders typically vote on decisions at shareholder meetings, with one share equaling one vote, so the majority shareholders have more influence. A shareholder with more than 25 percent of shares is a ‘person of significant control’ (PSC).
5. Create your company documents
Your company must have certain documents that recognize its formation and set out how it runs. These are:
The association memorandum
This is a legal statement signed by all initial shareholders stating that they agree to form the company together.
The association articles
These are the rules on how the company should be run, agreed upon by shareholders, directors, and the company secretary. You can use model association articles or write your own.
6. Confirm what records you need to keep
You will need to keep records of all significant details about the company, including its PSCs, as well as all its accounting records. Records must be kept for at least six years. Find out more on the government's website.
7. Register with Companies House
Finally, Open a Ltd Company and its official address at Companies House. Be sure to select the correct SIC code, as this specifies your business nature. You can register for corporation tax at the same time.
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