This is it. You’ve come up with a fantastic business idea, done your homework and have produced a rock-solid business plan. What do you do now?
The vast majority of aspiring business owners will choose to take the next step by incorporating their new business as a limited company through Companies House.
The process is quick, simple and will offer both you and your company a whole lot of benefits and protections. So, to help you understand the basics of company formation and how it could be right for your company, we’ve compiled this all-encompassing guide.
What is company formation?
Simply put, company formation is the process of registering your business as a limited company through Companies House. Companies House is the UK Government’s official registrar of companies, and it’s the only body in the UK permitted to officially incorporate your company.
So, what does it mean to incorporate a company? By incorporating a company, you essentially transform your business into its own legal entity. That means your company is essentially an individual person in the eyes of the law – and it’s important because it will offer you some much-needed protection in the event your business is unsuccessful.
By incorporating a limited by shares 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. As a company owner, you’ll only be liable for any amount up to the value of the shares you have in your company – and any amount of personal money you own beyond the value of those shares will be protected. This protection is referred to as “limited liability”.
The vast majority of private companies are limited by shares, which means that ownership is divided between the number of shares you choose to issue.
Strictly speaking, you don’t have to incorporate a company. It’s not a legal requirement in the UK. But if you choose to do business as a sole trader, there will be no legal separation between you and your business – and so if something goes wrong, your personal finances or assets could be placed at risk. That’s why a huge number of business owners decide to go down the route of company formation.
How do I form a company?
If you’d like to turn your new business into a company, you’ll be relieved the know the company formation process is quick and simple. It can be fully completed online (although you can also incorporate a company by post), and all you’ll need to get started is:
This is the fun part – although there are a few rules about the types of names you can choose from. We’ll get to that in a minute.
A registered office address in England and Wales, Scotland or Northern Ireland
This can be anywhere in your jurisdiction, but it must be a real address – not a PO Box. If you’d like to keep your address private, we offer professional address services so that your personal address stays off the public register.
A company director
This is the person responsible for managing your company. You can have more than one if you’d like.
A shareholder or guarantor
This is the owner of your company, and it can be the same person as your company director. That means you only need one person to incorporate a company, although you can have more than one shareholder.
A memorandum and articles of association
These are the founding documents of your company. We offer plenty of guidance on how to write these documents, or you can authorise us to complete them on your behalf.
Share capital of at least one issued share
This will only apply to limited by shares companies.
A Standard Industrial Classification SIC (code)
This is a code the government uses to identify your business based on the type of industry you’re operating in. You can use up to four SIC codes to describe what your business does.
If you’d like a hand getting started, we offer a wide range of company formation packages tailored to your business needs, and our easy-to-use platform means the entire process can be completed online in a matter of minutes.
We’ll then check over your application and send it off to Companies House – which will typically approve your application within three-to-six working hours, depending upon what their workload looks like and how straightforward your application is.
Once your company’s been incorporated, we’ll send you your company documents, VAT invoice and Webfiling Authentication Code, and your new business should register with HMRC and can start trading immediately. It’s really that simple.
How do I come up with a brilliant company name?
But let’s not get too ahead of ourselves, here. One of the first steps of incorporation, which is coming up with a completely brilliant name for your company, can sometimes be the most difficult part.
So, how do you come up with a great company name?
The best place to start is by thinking about the nature of your business. Try to come up with words or phrases that describe you, your business idea or the products or services you’re planning to sell. Don’t be afraid to get personal or cautiously explore puns. But if you’re really stuck, there are plenty of ways you can get the creative juices flowing.
You could transform a long or clunky phrase into an acronym, or mash-up two or three words to form a new and clever way to label your business. You could also look to mythology or fiction for inspiration, as well as foreign words or a dead language like Latin. Coming up with a name idea might be difficult, and you may need to ask for help from friends and family. It could take quite a while, too – but once you’ve found the right name for your business, you’ll know it.
Not only will the name you choose become legally tied to your business, but the government has a few rules you’ll need to adhere to when you register a new company name. So, what are the rules?
First and foremost, your company name must be unique. It cannot be the same as or too like the name of an existing company. For example, if your company is identical to another company’s name apart from a special character or certain punctuation, your application might be rejected.
If you’d like to make sure another company hasn’t already reserved your name, you can check instantly use our company name search tool.
You also won’t be allowed to use an offensive word in your company name, and you’ve also got to be careful about using sensitive words. You cannot suggest a connection to the UK Government, any devolved government, administration or public authority, either. Companies House will normally decide these on a case-by-case basis – but if you try to use words like ‘royal’ or ‘trust’ without first seeking permission, your application will most likely be rejected.
Just like Twitter, Companies House also imposes a character count on how long your company name can be. When incorporating a company in the UK, you’ll be limited to 60 characters for the purpose of coming up with a company name – and if it’s a limited by shares company, your name must end with either the word “limited” or its abbreviation (“ltd”).
If you’re now panicking about having to stick the word “limited” in neon lights above your new shop, don’t panic. Although the exact registered name of your company needs to be displayed and used when you carry out any type of trading activity, a lot of companies adopt a “trading name”. Your trading name can be a bit snappier, and so it’s normally easier to market and stick up in bright lights.
If you choose to operate under a trading name, you’re perfectly within your rights to do so. That being said, you will need to clearly state on company stationery – and somewhere on your website – what your trading name is, and what your registered name is.
How do I handle company reporting?
Owning a start-up can be a whole lot of fun – but it also means you’ll be responsible for some financial reporting. If you choose to incorporate your new business as a limited company, you will be expected to accurately report all of your business income, expenditures, liabilities and assets.
You must maintain these records at a named place in which officials would be able to access them is needed, and you must hold on to all of your business records for a minimum of six years from the relevant accounting period.
So, what exactly should you be recording in your company accounts?
First, you must keep accurate data on all the money your company receives and spends. You need to keep information on all of the assets your business owns, any debts it owes or any debts owed to your company by other people or businesses. You should also be keeping an inventory of all the stock your business owns at the end of its financial year, along with the stock takings used to work out that inventory.
You should also be recording all the goods your company buys and sells, who those goods are from and who they’ve been sold to. If you’re selling products in the retail market, you’re normally exempt from reporting the latter.
All of this information will then be used to prepare your company’s full, or statutory, annual accounts. You’ll also need to call on this information to file your company tax returns, pay corporation tax or file for and pay Value Added Tax (VAT). These are all regular accounting responsibilities you’ll be expected to fulfil as part of running your company.
The big one is your company’s statutory accounts. These are due every year – whether your company is trading or not. You’ll be expected to file them with Companies House within nine months of your accounting reference date – which is normally the anniversary of the last calendar day of the month in which you incorporated your company.
If you’d like to learn more about statutory accounts and what you’ll need to include before filing, you can check out our detailed guide.
You’ll also need to be sure to stay in touch with Companies House and HMRC. You can consult our list on the changes you must report here.
The bottom line
At first glance, this seems like a lot to take in. By forming a company, you’re taking a big step towards transforming your pie-in-the-sky business idea into a very real, thriving enterprise – and in order to do that, you’ll admittedly need to take on a few legal responsibilities. But once you get the hang of it, your reporting requirements and legal obligations as a limited company owner are actually pretty straightforward.
At the end of the day, forming a limited by shares company will offer both you and your business some much-needed protection, freeing you up to worry less about finances and more about getting out there and making your new business work.