In this series, we are looking at what’s involved in starting your own limited company. Our first post looked at choosing a name and how important it is to get that right. As discussed in Part 1, there are strict rules about what you can and can’t do when you set up your company.
Most of these rules apply whether you’ve just started a business in your bedroom or your company is turning over millions of pounds. Understanding the rules when you set up will help prevent problems down the line. Mistakes, when you set up, could lead to your company being shut down, fines, or in the worst case scenario, could lead to prosecution.
We can’t give you an exact breakdown of all the rules that apply to limited companies because we’d be here all year. We can, however, give you an overview of the main issues. We are going to break this down into two areas: people and paper. First, let’s take a look at what people will be involved in company formation and what roles they’ll have.
Most people who start their own business appoint themselves as the Managing Director or MD. This is more than a nice title to put on your business cards. Being a business director comes with specific legal duties, and in many cases, it’ll be the director that ends up in court if the company breaks the rules.
The gov.uk website outlines the following responsibilities for all company directors:
- Try to make the company successful;
- Follow the companies rules;
- Make decisions that benefit the company, not yourself;
- Tell other shareholders if you could benefit from a business transaction personally;
- Keep company records and report changes to Companies House and HMRC;
- Ensure the company’s accounts are ‘true and fair view’ of the business’ finances;
- Register for Self-Assessment and submit a personal Self Assessment tax return.
Every limited company has to have at least one director. Almost anyone can be a company director, as long as you are at least sixteen years old, and haven’t previously have been disqualified. Limited companies can be directors of other limited companies, but there has to be at least one human director alongside them.
Directors are not the most powerful people in a limited company, even though they have most of the responsibility. The most powerful people are the shareholders. For instance, they can inspect the company accounts, decide on the director’s salary and vote directors out of the company.
Limited companies have to have at least one shareholder. This means that if you’re setting the business up on your own, you’d be the only director and the sole shareholder. If other people are going to be involved, you need to think about how many shares they’re going to have and what rights that gives them in controlling your business.
You may be familiar with the Dragon’s Den scenario of giving 20% of your company away for £50,000 or similar. This valuation is subjective in a private limited company. Shares in a private limited company only have a nominal value and the value of the shares does not relate to the value of the business. So if someone thinks that 20% of your business is worth £50,000, that’s what it’s worth. But this valuation is not tied directly to the price of individual shares. This is not to be confused with a public limited company which has shares that are bought and sold on the stock exchange and the value of the company changes as the value of the shares change.
Registration at companies house
Now that you’ve thought about what to name your business, and who to involve, you need to make it official by registering at Companies House. Companies House are the official register of limited companies in the UK. You cannot use LTD or Limited as part of your business name unless you are registered with them. To do this, you’ll need to complete and submit the IN01 form, and the Memorandum and Articles of Association. You can find examples of these on the Companies House website.
The Memorandum of Association is a statement by the shareholders. It includes the names of the members, the fact that they wish to be forming a company, and an agreement to take at least one share each. The Articles of Association are the rules for your business. It will provide the details of running the company, the internal management and the legal responsibility. It’s one of the defining characteristics of limited companies in the UK that you can write the Articles of Association in virtually any way you want, so you can structure your business to suit your needs.
You can submit these documents to Companies House directly, or you can make use of third party formation agent who will do all the legwork for you. Once Companies House has accepted your application, they will give you a company number which you will need to quote on official company correspondence.
Many people think that if you register a company with Companies House that is all you need to do. Unfortunately, this is not the case. As we discussed in Part 1, registering a company name at Companies House does not always mean you have the right to use it. Similarly, registering a company at Companies House does not make it compliant with all the rules and regulations surrounding companies. Registration with Companies House is just the first step and is only the beginning of the paperwork.
There are four main areas of legal compliance which you will need to be aware of:
- Statutory Registers (documents which give details of the directors, shareholders and the running of the business);
- Directors Service Contract (the director is technically an employee and therefore needs a contract);
- Data Protection Registration (you need to safeguard the information you have, and use it appropriately);
- Accountancy Compliance (you are required to keep appropriate records and submit various accounting reports throughout the year).
Depending on the nature of the business there will be different obligations which you will need to ensure are met, and the documents you’ll need to have varied from business to business. It’s not just Companies House you have to comply with. The four points above are areas which are covered by Companies House, HMRC and the Information Commissions Office (ICO), and those are just some of the bodies you have to be compliant with. You will need to do some research on your industry to find out who else’s rules you are subject to.
Getting to grips with all these different regulations can seem very daunting, but the rules are there to protect everyone. One of the reasons lots of businesses like to deal with other limited companies is because they know they have to comply with all these rules, and they know it’s easy to check whether they are compliant or not. Once you understand the basics of how companies work it isn’t that hard to stick to the rules. There’s lots of help and advice out there if you are prepared to dedicate a bit of time to doing some research. Formation agents are a good place to start when you’re setting up as it is their business to set up companies properly.