You’ve got a great business idea and a solid business plan… but what’s the next step to starting a business? Most aspiring entrepreneurs choose to form a limited company at this stage. To help you get to grips with this, here we explain how to set up a new company in the UK.
It’s quick, simple and good for you and your business. By the end of this guide, you should have a good understanding of the basics of the company registration process.
What Is Company Formation?
In short, UK company formation is the process of registering your business through Companies House – the UK Government’s official registrar of companies. It’s the only body in the UK allowed to incorporate a company.
So, what does it mean to incorporate a company? By incorporating a company, you turn your business into its own legal entity. That means your company is essentially a person in the eyes of the law. This is important because it will give you some much-needed protection if your business fails.
By incorporating a company, you will drive a legal wedge between you and your company in terms of shared finances, liabilities, contractual agreements and ownership of any property or assets.
Different Business Structures Explained
Here’s a quick summary of each company structure and how they compare.
Sole trader
Being a sole trader is often referred to as being ‘self-employed’ though there are other forms of self-employment (being a contractor for example). Sole trader is the most popular structure, and also the simplest.
You pay on your profits (not corporation tax), so any profits above £45,001 will be taxed at 40%, and profits above £150,000 will be taxed at 45%. Depending on your profits, you may also have to pay National Insurance (NI) contributions. Being a sole trader doesn’t mean you work alone.
Partnership
In a partnership, a number of individuals sign a partnership agreement to decide how the business’s ownership, profits and liabilities are shared between them and how partners can leave the partnership.
A partnership is similar to the sole trader structure except there are at least two of you. There is no legal upper limit to the number of partners though very large partnerships can be harder to manage. Each partner registers as self-employed and submits a separate. Your tax and NI obligations are the same as a sole trader.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a popular structure for professional services such as accountancy and legal firms. In most respects, they are similar to ordinary partnerships (see above), but as the name implies, they have (like a limited company). An LLP must be registered, and at least two partners must be ‘designated members’ who file the annual accounts.
Limited Company (LTD)
Incorporating your UK business as a limited company structure requires you to register it. This company incorporation creates a separate legal entity, which is your company. The main advantage of setting up a limited company is that its finances are separate from yours. This reduces your personal exposure to financial risk, so if the business fails (or is sued), then you are liable only for the face value of your share in the business.
Another big advantage is the tax regime: companies pay corporation tax at 19% on their profits. This can be more tax efficient than paying income tax on income, especially for higher rate taxpayers (though as a company director, you will still have to find a way to take income from the company, such as salary or dividends, which will be taxed accordingly).
Things to Consider When Choosing a Business Structure
Setup Costs: Some structures are cheaper and quicker to set up than others. Sole traders usually have the lowest setup costs, while limited companies may need more paperwork and professional help, which can add to the cost.
Tax Implications: Different structures are taxed differently. Sole traders pay income tax on profits, while limited companies pay corporation tax. Choosing the right structure can help you keep more of your earnings.
Paperwork Burden: Running a limited company means more admin. You’ll need to file annual accounts and keep detailed records. Sole traders and partnerships have fewer reporting duties, which means less paperwork.
Public Disclosure: Limited companies must disclose certain information to the public, like director names and annual accounts. If privacy is important, being a sole trader or a partner may be a better fit.
Unlimited vs Limited Liability
Limited liability and unlimited liability refer to the extent to which owners of a business are responsible for the company’s debts and obligations.
- Unlimited Liability: Unlimited liability means the owners of the business (such as sole proprietors or general partners in a partnership) are personally responsible for all of the company’s debts and obligations. If the business is sued or can’t pay its debts the owners may have to use their personal assets to settle the liabilities. This is common in sole proprietorships and general partnerships.
- Limited Liability: Limited liability means the owners of the business (such as shareholders in a corporation) are only liable for the amount of money they have invested in the business. Their personal assets are not at risk if the company incurs debts or legal liabilities. This is common in corporations, limited liability partnerships (LLPs) and limited liability companies (LLCs).
Reporting Requirements for Each Business Structure
Sole Trader: You must register with HMRC and file a self assessment tax return each year. You also need to keep records of your income and expenses, but the admin is quite simple.
Partnership: Each partner must file a self-assessment tax return. The partnership itself also needs to submit a separate return. You’ll need to keep records of all income, costs and how profits are split.
Limited Company: You must register with Companies House and file annual accounts and a confirmation statement. You’ll also need to submit a corporation tax return and keep detailed financial records throughout the year.
Limited Liability Partnership (LLP): An LLP must file annual accounts and a confirmation statement with Companies House. Each member also submits a Self-assessment return. The reporting is similar to a limited company.
Company Formation Process: Steps to Register Your Business
For LTDs:
- Name check:
Check if your business name is already taken. You can check this on the Companies House website. Choose a name that follows the rules and stands out. - Register with Companies House:
Register your company online with Companies House. It takes a few hours and costs £12. You’ll need to provide company details like your business name, address and directors. - Set up a company bank account:
Once your company is registered at Companies House, open a business bank account in your company’s name. This keeps your business finances separate and professional.
For Sole Traders
- Register with HMRC:
Sign up with HMRC as a sole trader. It’s free and takes a few minutes online. You need to do this so you can file a self-assessment tax return. - Start trading tomorrow:
There’s no waiting around. You can start working as soon as your company is registered. Just keep track of your income and expenses from day one.
FAQs
How long does it take to register a UK limited company with Companies House?
Setting up a company or registering a company doesn’t take long if you complete and file an online company application form through Rapid Formations. Generally, it takes up to 24 hours from choosing a company name to getting your application approved at Companies House.
You can do this on your own or using the services of a company formation agent. Company formation agents offer company formation packages and will help form your company without too much hassle.
What company documents are required for UK company registration?
To register a company in the UK, you’ll need a few key documents: Company Name and Address, Memorandum of Association, Articles of Association, Details of Directors and Shareholders, Statement of Capital, and People with Significant Control (PSC).
Can I register a UK company if I am not a UK resident?
You can set up a UK limited company even if you are a non-UK resident. The application process and legal requirements are the same for everyone, regardless of where you live.
Do I need a UK registered office address to form a company?
The address you register must be a physical address in the UK. in the same country your company is registered in. For example, a company registered in Scotland must have a registered office address in Scotland.
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