How to set up a limited company

How to set up a limited company

Posted: Mon 23rd May 2022

You don’t need a lawyer or an accountant to set up a limited company.

Here are 10 simple tips to get the ball rolling in an easy and pain-free fashion.

Buckworths is the only law firm in the UK market working exclusively with start-ups and high-growth businesses.

For more information, connect with Michael on Enterprise Nation today.

1. Use Companies House

Companies House is the UK companies regulator. If you use their platform, you can incorporate your company and register with HMRC for corporation tax at the same time.

Unlike other platforms, Companies House won’t spam you or try to cross-sell you services you don’t need. It will cost £12.

2. Use standard articles of association

Articles of association govern the day-to-day rules of the company and the relationship between your directors and shareholders.

During the registration process, you’ll be offered the choice of using standard articles or creating bespoke ones.

Tick the box to use standard ones. You can change them later, probably when you carry out your first investment round or bring new shareholders on board.

3. Choice of address

You’ll need to register your company at a UK address. Remember, this address will be made public so think twice before using your home address. Make sure whatever address you use is reliable as this is where you’ll receive important mail.

4. Choose the right share capital

The shareholders are the owners of your company. When you incorporate, you’ll be asked to choose a type of share. Choose ‘ordinary’, which carries a vote, the right to receive a dividend (of profits), and a share of proceeds when the company is sold.

You can add additional share classes later if necessary. You’ll then be asked to choose a number of shares and a nominal value.

We suggest starting with 10,000 shares with a nominal value of 1p each, totalling £100 of share capital. Once the company’s bank account is set up, you’ll transfer £100 into it.

5. Open a company bank account

The next step would be to open a bank account in your company’s name.

Although high-street banks offer more comprehensive services than the challenger banks such as Starling and Tide, they have slow and archaic procedures for opening company bank accounts.

If you want to speed up the process, you might want to go with a challenger. You can always switch to a high-street bank at a later stage.

6. Appoint only one director at first

High-street banks require at least one of the directors to be a UK resident. They also carry out checks on every company shareholder and director, so generally, every director and shareholder will have to go into a branch and produce their ID.

It’s often easier to get the account opened if only one person is involved. You can add more account holders later.

If you don’t have a UK director, opening an account can be difficult. Try to speak with a bank in your home country and see if they can help getting an account opened in the UK.

7. Keep a lookout for your mail

You’ll start receiving important letters from Companies House and HMRC. The first Companies House letter contains your online filing code, which you’ll need when submitting your accounts and other documents online.

The HMRC letter has your company’s unique taxpayer reference (UTR), which you need when you register for VAT, file your accounts, and apply for tax reliefs.

Don’t lose these letters as it can take months to receive replacements!

8. VAT – to register or not?

Now you’ve set up your company and bank account, you need to consider whether to register for VAT.

VAT is a tax charged on most goods and services in the UK at a default rate of 20%. When your annual turnover hits £85,000, you must be registered for VAT.

However, you’re allowed to register sooner if you want. The advantage of registering is that you can reclaim the VAT you pay out in buying goods and services for your business and effectively save 20%.

The disadvantage, however, is that you have to add VAT to every invoice you send. That can make you 20% more expensive if your clients aren’t VAT-registered and thus unable to reclaim it.

So do you register early or not? The answer tends to depend on whether your customers are primarily businesses or consumers. If your business mainly sells to consumers (the general public), you may want to delay registering for VAT as long as you can.

Once you’re registered, you’re 20% more expensive as consumers aren’t registered for VAT. If you sell to businesses, they will mostly be VAT-registered so can reclaim the VAT you charge.

Make sure to ask your accountant if you wish to register early, as some of the questions HMRC ask are complicated and you want to make sure you get it right.

9. Paying yourself

You can pay yourself a salary or via dividends. If you want to be paid in dividends, remember that your company can only pay a dividend once it’s profitable.

Until then, you’ll need to draw a salary. Many founders pay themselves a salary up to the limit of the nil-tax band (i.e. £12,500 p.a.), meaning they pay no tax. If there are profits, they declare a dividend for the balance of their income.

Don’t forget that dividends tend to be taxed at the end of the year. You might want to consider paying a bit more tax on a monthly salary and avoid being hit with an unpleasant liability later on.

10. Keeping records

Don’t forget to keep your track records organised. Get accounting software from day one and commit to entering your invoices and receipts on a weekly basis to keep your records accurate and up to date.

This will help you understand your business’s financial position and make life easy for your accountant when it comes to filing tax and VAT returns.

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