Step by step on how to set up a limited company in the UK

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If you’re thinking of running your own business, then one of the first decisions you’ll need to make is how you will operate. In the UK, there are four different forms of business structures you can use to run a business – as a sole trader, a partnership, limited liability partnership (LLP) or as a limited company. There are advantages and disadvantages to each business structure, however setting up a limited company is very common and there are over 4 million private limited companies in the UK. This article aims to be a comprehensive step by step guide on how to set up a limited company in the UK and will be ideal for those who are looking to set up a new limited company themselves. If you get stuck along the way, we’re only a phone call away.

What is a limited company?

A limited company is a type of business structure that is particularly different to a sole trader or partnership because the company is considered to be its own separate legal entity. This means that the company can hold its own and dispose of its own assets, as well as apply for loans and accrue debts which are separate from those who run the company. What’s more, it’s different to the other two business structures because limited companies benefit from limited liability which means that those who own the company (the shareholders) are only legally responsible for the company’s debts up to the value of its shares (the amount of money already invested into the company). Shareholders are not personally responsible for the business’ financial losses unlike for sole traders or partnerships.  

What are the advantages of running a business as a limited company?

• As mentioned above, one of the key benefits of running a business as a limited company in the UK is limited liability. So long as owners/directors of the company have acted responsibly, they will not be legally or financially responsible for the company’s failings. This means that creditors are only able to seize assets from the company, but not from you personally (such as your car or your home) unless you have secured a loan against your personal assets.
• As a limited company you are required to pay corporation tax as opposed to income tax. The main corporation tax rate is 25% or 19% if your company qualifies for the Small Profits Rate. If you are between the upper limit and lower limit, then you’ll be eligible for Marginal Relief. This does not seem like a significant saving if you compare it to the basic income tax rate of 20%, however savings become considerable when compared to the higher rate income tax (40%) or additional rate income tax (45%).
• There are far greater tax-saving opportunities when operating your business as a limited company than when compared to a sole trader or partnership; this is because you have the ability to choose whether you want to keep the profits within the company to further invest and grow the business or extract profits for your own personal use.
• When you run your business as a limited company you have the ability to extract profits as dividends. This makes use of your annual tax-free dividend allowance (£500 from April 2024) as well as gets taxed at a lower rate than income tax on salaries.
• A limited company allows you far greater flexibility to divide ownership of the company through shareholders than running a business as a sole trader or partnership.
• You may find that as a limited company, it is easier to raise finances and secure loans than as a sole trader. This would also include the ability to sell the shares of your business to others in order to raise capital.
• Running a business as a limited company can hold more credibility with customers and suppliers. It may be easier to grow your business and market yourself against competitors.
• When the time comes where you may want to retire or do something different, your business will be an asset which you can sell. This is much more difficult to do as a sole trader or partnership.  

What are the disadvantages of running a business as a limited company?

• One disadvantage to running your business as a limited company is being more prone to public exposure because all limited companies must be registered with Companies House which is accessible to the public. Details which are readily available include your own personal details such as name, date of birth, nationality and occupation as well as your business address (which could be your home address if you have chosen this to also be your business address).
• It is more expensive to set up a limited company than it is to start your business as a sole trader or partnership.
• There are significantly more administrative responsibilities that you are legally obliged to fulfil when you run your business as a limited company which can take more time.
• There are multiple different deadlines that you must adhere to for administrative filing when you are a limited company that can result in fines if you are late.
• It can be less beneficial to run your business as a limited company if your earnings are within the basic rate income threshold because the company will be charged corporation tax on its profits and then you will be charged income tax on any money withdrawn from the company for personal use either through salary or dividends.
• There are more fees to pay as well as formal procedures to follow if you want to close down a limited company.
• If you require help from an accountant to complete your tax and accounting duties, then you should bear in mind that these fees are likely to be more for a limited company than for a sole trader or partnership.
• Limited companies are required to complete audited accounts once they reach the audit threshold, however sole traders and partnerships are exempt from this.

Do I need to hire a solicitor to set up a limited company?

There is no legislation which makes it a requirement to use a solicitor when setting up a limited company; however, it can be helpful to some depending on the nature of your business. It is advisable to use a solicitor when setting up a limited company if you will need contracts drafted for you to deal with customers, suppliers, employees, or if you intend to purchase or lease commercial buildings or land for your business. A solicitor will be able to provide advice on the different business structures as well as help you register with Companies House.

Do I need to hire an accountant to set up a limited company?

Again, there is no formal requirement which makes it mandatory for you to use an accountant when setting up a limited company in the UK. However, many people find it helpful as an accountant will not only register your new limited company with Companies House, but also ensure you are registered for the correct taxes with HMRC, including corporation tax. You may also need to be registered for other taxes such as PAYE or VAT which an accountant can help with. Similar to a solicitor, an accountant would be able to give you advice on the different business structures and explain how each structure is taxed differently

Should I use a company formation agent for setting up a UK limited company?

Another option to setting up a limited company in the UK is to use a company formation agent. Company formation agents often have varying levels of different packages you can choose from, but at their most basic, will ensure that your new limited company is registered with Companies House. They’re an attractive option to many as they are often very fast and affordable; however, they are unable to provide detailed legal or tax advice.

Can I set up a new limited company by myself?

Yes, you can set up a new limited company by yourself. If you do not require any help, there is nothing stopping you from registering your new limited company directly with Companies House yourself. This option is by far the cheapest, however it can be time intensive, especially if you need to go back and correct any details. It is best suited to experienced entrepreneurs who are familiar with the procedure. If you would like to set up a new limited company by yourself, this guide will provide all the steps you need to take.

How much does it cost to set up a limited company in the UK?

From 1 May 2024, the minimum charge for setting up a new limited company in the UK has gone up to £50 from £12 if you choose to register online directly with Companies House and pay by debit card or credit card. If you are unable to set up a limited company online, you can still do so via post, but it will now cost £71 (up from £40) and will need to be paid by cheque.

How long does it take to set up a limited company in the UK?

How long it will take to set up a limited company will depend on how you have chosen to do this – whether you are using solicitors, accountants, company formation agents, or doing this yourself. The application process is relatively straightforward as long as you have all your information and documentation to hand. If you are doing this yourself, it should not take more than a few minutes. However, for your application to be approved it can take as fast as between 3 – 6 hours, or within 24 hours which is what Companies House claims to aim for. Be aware that on busy days or if Companies House requires clarification on the information provided, there can be delays. If you have used a postal application to register your new limited company, then be prepared for it to take between 8 – 10 days once Companies House has received your paperwork.

Step by step on how to set up a limited company in the UK

If you’d like to set up your new limited company by yourself, then our comprehensive step by step guide will allow you to prepare all the information you will need to do so.

1. Decide on a company name

Your limited company needs its own identity which will be its name. Before you choose a company name, you should check on Companies House’s register whether the name has already been taken or not. If someone else is already using the name that you want, you will have to choose something else. There are rules regarding what you can name your company. For example, it cannot be offensive or use sensitive words. Finally, your company name must end with either “Limited” or “Ltd”. Only in very specific circumstances can a company not use Limited or Ltd which is usually when the company will be a registered charity.

2. Have at least one director who will be responsible for the company

That will be you! If you want to run your limited company with other people then you are free to have as many directors as you would like. You can appoint other directors at the set-up stage of your limited company, or appoint more directors even after your limited company has been registered. Do consider what would be practical though, as directors are ultimately responsible for ensuring the company’s legal obligations are completed.

3. Appoint a company secretary if you would like to

Since 2008, it is no longer mandatory for private limited companies to appoint an official company secretary, although it remains a requirement for public limited companies. Only companies where their articles of association (the rules which the company must follow) require a company secretary must still do so; however, the articles of association can be amended if proposed by the company director(s) and agreed by a majority vote of the shareholders. If you are setting up your own limited company, our advice is that it would be simplest not to stipulate a company secretary as a requirement, and you can simply change this later on if needed. However, it’s important to be aware that although you may not need a formally assigned company secretary, all limited companies must still ensure that company secretarial duties are fulfilled.

4. Determine your share capital and shareholders

Shares in a company are ownership in a company, so all limited companies must have at least one shareholder (someone to own it!). However, you can have as many shareholders as you like, and shareholders can also be directors. The share capital can be anything you like and will be how much you initially invest in the company. For example, you may decide that there will be 10,000 shares with the value of £0.01p each which totals to £100 of share capital. £100 will be put into the company’s bank account once this has been set up. 1 share will normally be equal to 1 vote and any shareholder with at least 25% of the company’s shares will be considered as a ‘person of significant control’. To begin with, and to keep things simple, we recommend that shareholders each hold ordinary shares which means that they benefit from the right to vote, to receive dividends, and to receive any distribution if the company is wound up. Other classes of shares can then be created laterif needed. You may want to consider making your spouse or partner a shareholder in the company in order to take advantage of their dividend allowance.

5. Collate your company documents

The company formation process will require that you supply Companies House with various company documents. These include:

• The memorandum of association – this is a signed legal statement from all the shareholders of the company agreeing to form the company.
• The articles of association – these are the official rules of how the company will be run as agreed by the shareholders, directors, and company secretary. You can choose to use a standard article or create your own.
• Complete form IN01 – this form records all your company’s information including the company name, the trading activities (often referred to as the SIC code), the company’s registered office address, details of the directors and any company officers, and how the share capital has been divided by shareholders, as well as who the people of significant control are.

6. Register with Companies House and HMRC

The final step is to register all this information with Companies House. The simplest way to do this is online and you’ll be able to register for corporation tax with HMRC at the same time. If you get stuck at this stage, you can always choose to ask for help from a solicitor, accountant or company formation agent.

What happens after I register my new limited company with Companies House?

Now, all you have to do is wait for your certificate of incorporation which will arrive in the post. This confirms your company incorporation as well as provides you with a company number and official date of formation. You’re now free to run your business! If you’re not quite ready, you can also choose to make your company dormant by contacting HMRC once you have received the company’s Unique Taxpayer Reference (UTR) from them.

What else needs to be done when I’ve set up a limited company?

Once you have registered your new company with Companies House, be mindful that there is still much to do! We recommend ensuring that the below steps (some are mandatory, and others are optional) have been considered at the very beginning of your company formation so that your business can run efficiently:

• Be aware of what records need to be kept. This is technically mandatory, as failing to be able to present these records when requested or at certain deadlines can lead to penalties or even you becoming disqualified as a company director. You must keep records about your limited company, and you must keep accounting records.
• Set up a business bank account. Although this is not a strict legal requirement, it is highly advisable that you set up a business bank account for your limited company that is separate from your personal bank account. This will allow you to keep financial records much more easily.
• Choose the appropriate business insurance. Every business is different so make sure you have considered your business’ needs. At a minimum, every small business is legally required to have employer’s liability insurance where you have employees (you may not need this if your employee is a family member or someone who is based abroad).
• Set up a PAYE account if you are going to pay yourself a director’s salary. This is optional as not all directors will pay themselves a salary at first, especially when the company is yet to be profitable. However, paying yourself a salary does extract funds from your company and will reduce your corporation tax. Bear in mind that you may also need to pay National Insurance if you pay yourself a salary.
• Consider whether you want to be VAT registered. It is only a legal requirement to be VAT registered once your company’s annual profits reach £90,000 or more. However, many businesses will voluntarily register for VAT due to certain benefits, so you may want to find out if you can take advantage too.
• File your first company tax return when it’s due 12 months after the end of your accounting period and your first annual accounts with Companies House which is due 21 months from the date of your incorporation.
• Ensure you comply with your other legal responsibilities such as your company secretarial duties and filing of your confirmation statement.

What if I don’t want to run my limited company anymore?

If in the future you decide that you no longer want to run your limited company, you will have a few options. If your company is well-established, you may want to sell your limited company as it will have become a valuable asset. If so, we would recommend looking into how Business Asset Disposal Relief can help you reduce any capital gains tax you may incur. Alternatively, you may choose to hand your business over to your children or other family members in which case our advice would be to speak to us to find out about holdover relief. Finally, you can simply choose to wind up your company and close it down. How you do this will be dependent upon whether your company is solvent or insolvent.

Get help with setting up a new limited company in the UK

If you’re looking for additional support for your new limited company beyond simply incorporation then choosing Ridgefield Consulting, Oxford accountants, can be the ideal solution that helps you with bookkeeping, corporation tax and annual accounts filing. Get in touch by using our contact form to see how we can create a tailored service for getting you set up.