How to set up a limited company

A handdrawn road map on a piece of wood outlining how to establish a business

Deciding to set up your own business is a huge decision and no doubt there are lots of things you may wish to consider before you take the plunge; including whether or not you wish to establish yourself as a limited company.

There could be a number of reasons why you may want to set up as limited company. For most, setting up as a limited company is an attractive option as it ensures that your personal assets are completely distinct from company finances. This is vastly different from sole traders, who are personally liable for their business actions.

Whatever your motivation, you need to ensure that you strictly adhere to the Companies Act when setting up your limited company. This is the central framework in which companies with limited liability must work.

Our basic guide may offer you insight into how to correctly incorporate a limited company, from choosing your company name to filing important legal documents.

Deciding on a company name

Before you can supply Companies House with any incorporation paperwork, you need to check that your business name is available for use.

Selecting a name for your company can be harder than you might think. Depending on your industry type and other such factors, you may have to drop a number of names before you find one that you’re really happy with and that isn’t already taken.

There are a few other rules that you need to bear in mind when choosing your name:

• It seems obvious but you company name should include limited, Ltd, public limited company or plc. This should always be at the end of the name

• The name should not be offensive

• The name should not include any sensitive words or expressions unless you have obtained special permission to use them

To check whether your name is already in use, you can phone Companies House direct on 03031234500, or by using their useful WebCHeck service. You will need to check your chosen name on both the ‘Current and Recently Dissolved’ register and the ‘Proposed Names’ register.

Incorporating a limited company

Fortunately you can now apply online or via the traditional paper format; an advantage to applying online means there is less scope for errors. The prices for forming a limited company via these two methods vary so be sure to check out the latest prices – they may be subject to change.

There are three key documents that you need to file in order to incorporate a limited company. It is quite common for company directors to employ an intermediary to complete these on their behalf, but this is not actually a legal requirement. The documents are:

  • Form IN01

On this form, you need to state your intended Registered Office location (must be in the UK), details of the consenting Secretary and Director(s), subscribers, and details of the share capital if the company is limited by shares.

  • Memorandum of Association

This contains the names and signatures of subscribers wishing to form the company. Also, if the company is limited by shares, you will need to obtain a commitment by subscribers to take at least one share each.

  • Articles of Association

This contains the rules for the management affairs of your company. The Articles of Association (often referred to as just ‘articles’) looks at meeting procedures, shareholder rights, how dividends are paid, and similar items.

Your obligations

After you have completed the initial set up of your limited company, there are a set of requirements that need to be followed on a regular basis. This is an overview of some of the obligations you’ll need to fulfil as a limited company:

• Any person employed by the company must pay income tax and national insurance

• Annual accounts must be filed with Companies House. Your Annual Reference Date (ARD) is put at the end of the month in which you set up your limited company. Typically, you are required to submit your accounts within 9 months of this date

• An annual return must be filed with Companies House. This gives a snapshot of key information such as your registered office, company directors, the company secretary, the share capital etc

• An annual HMRC corporation tax return must be completed within 9 months of the company year end every year. This is a tax on the taxable profits of your limited company. If your company is UK-based, you will have to pay Corporation Tax on all your taxable profits, regardless of whether these were generated from outside of the United Kingdom

Business Insurance

After you have set up your limited company, you may want to consider finding out more about business insurance and whether or not it’s right for your business.

There are generally three core types of business insurance – public liability insurance, employers’ liability insurance, and professional indemnity insurance. These may vary depending on the exact nature of your business.

Legal payouts can often run into thousands of pounds, therefore it is important that you carefully consider your options and assess whether your business is adequately prepared.

  • Public liability insurance

As a general rule, if you own a business that comes into regular contact with clients or customers, you may want to consider taking out public liability insurance. This type of insurance is not mandatory however could cover you against compensation claims awarded to members of the public should your business operations cause them injury or damage to their property.

  • Employers’ liability insurance

Employers’ liability insurance is a legal requirement for any business in the UK that has employees (outside of your immediate family members). It protects you against claims issued against your business by employees that have suffered an injury, illness or damage to their personal property as a result of working for you.

  • Professional indemnity insurance (also known as PI insurance)

Professional indemnity insurance differs from public liability insurance in that it covers those who provide advice, design work or other types of professional services. Architects, accountants, engineers, and publishers are just a few examples of the types of professions that may require this type of insurance. As well as insuring against claims of professional error, omissions or neglect, it can cover the legal fees involved with defending a claim.

Tell us in the comments section about your own experiences of setting up a limited company.