If you are setting up in business and trade as a sole trader or partnership you will be personally liable for any claims or liabilities arising in connection with that business. There are alternative business models including limited liability partnerships and companies limited by guarantee and shares.
Setting up your own company is a relatively straightforward process but there are pitfalls to be wary of. This article provides guidance on what a limited company means under English law and explains how, why and when entrepreneurs might set up a company and some of the potential issues that may require legal advice.
What is a limited company?
A limited company is a legal person.
Limited companies are owned by the ‘members’ whose liability is limited either by their shareholding or guarantee. The members of a company limited by shares are commonly referred to as ‘shareholders’ because their ownership of the company is represented by how many ‘shares’ they own.
What is the difference between a private company limited by guarantee and a private company limited by shares?
A private company limited by shares is:
- Legally and financially separate to the people who own/run it.
- Has shares and shareholders.
- May keep any profits it makes (after tax is deducted).
A private company limited by guarantee is:
- Legally and financially separate to the people who own/run it.
- Guaranteed by a ‘guaranteed amount’ which the members agree (normally limited to £1 each).
- Not for profit – typically, companies limited by guarantee invest any profits back into the business.
What are the benefits of limited companies?
Key benefits of limited companies include:
- The company can employ staff and own assets: The company can enter into contracts, employ staff and own assets (amongst other things) in its own name.
- The company has to act in line with its own internal rules: Private Limited Companies are defined by a set of ‘articles of association’. These articles are the rules and procedures setting out the relationship between the company and its members, and the relationship of the members to each other.
- The company has its own separate finances: This means members and shareholders can separate business and personal life because their liability for the losses of the company is limited. Additionally, companies limited by shares may keep any profits made after paying tax and can distribute any profit (after tax) to its members by a ‘dividend’.
What is the difference between a private limited company and a public limited company?
Generally, anyone can buy shares in a public limited company. They are normally owned by a much greater number of shareholders. A private limited company is owned privately by a smaller group of people, who get to control who buys into the company and when.
How to set up a private company limited by shares
There are three ways to set up (incorporate) a private company limited by shares:
Apply online through Companies House
Applying online through Companies House web-filing usually takes between 24-48 hours for your application to be processed. The application fee is £12. Using this method:
- Your company can only use the model articles. These may not be appropriate for your needs but we can support you in this process.
- Your company may have a maximum of 5 officers (directors and secretaries). You can appoint more in the future, if required.
- Your company can only have ordinary shares, this means you cannot incorporate with Alphabet Shares. Alphabet Shares can allow a company to declare different dividends to different classes of shareholders. If you want to incorporate using this method and you want Alphabet Shares then you will need to change this later.
You cannot apply online if:
- A parent company will control the new company.
- The new company will be taking over another business, including a sole trader, partnership, or separate existing company.
- Any of the subscribing members will be a ‘corporate body’ (i.e. another limited company or a limited liability partnership).
Apply online through an Incorporation Agency
You can set up a private company limited by shares online via an Incorporation Agency. The fee depends on the agency (potentially upwards of £80 plus VAT) most will offer a same day service.
Applying this way offers more flexibility because:
- You can chose either standard model articles or bespoke articles which have been tailored to your specific requirements.
- You can appoint any number of officers (directors and secretaries).
- The share capital may consist of different classes of shares subject to provisions within the articles of association.
- Both individuals and corporate bodies may be subscribing members.
Submit a paper application to Companies House via post or in person
If you choose this option, the fee is usually between £40 and £100. There is a Same Day Service available, otherwise it may take up to 14 days. The same day service is available provided the application is delivered to Companies House before 3pm. This method offers full flexibility to incorporate your new company in the manner you require.
How to set up a private company limited by guarantee without share capital
You can apply to set up a private company limited by guarantee without share capital only by submitting a paper application to Companies House via post (or in person) or online through an Incorporation Agency.
Both of these application methods afford some flexibility when setting up your new company:
- Either model articles for guarantee companies or bespoke articles may be used.
- The liability of the initial subscribing members and subsequent members of the company will be limited to a set amount (usually £1). With these two methods you can appoint any number of officers (directors and secretaries) from the outset, and both individuals and corporate bodies may be subscribing members.
Steps to set up a limited company
Steps to take when setting up your company include:
- Make sure setting up a limited company is right for you, and ensure the company articles of association are appropriate for the type of company, its aims and its objectives.
- Choose a suitable company name, be careful with similar and existing business names or names consisting of sensitive or restricted words such as ‘Society’ and ‘Queen’. A solicitor can help you to apply for special permission if appropriate.
- Decide on a registered office address for the company but bear in mind this information will be available to the public.
- Decide on the Standard Industrial Classification (SIC) code that applies. This code is specific to the type of business carried on by the company and more than one code may apply.
- Individual directors and company secretaries must be over 18 years and lawfully able to be appointed, this means you cannot appoint an undischarged bankrupt or someone who has been otherwise disqualified and they must willingly consent to be appointed as your company director.
- Individual members must be over 16 years.
What happens after you set up a limited company?
Once the company is incorporated the company name, address and company registration number should be clearly displayed on all official company paperwork, (including your website if you have one). You must display a sign showing your company name at your registered company address and wherever your business operates but if you are running your business from home you do not need to display a sign. Companies House will send an authentication code to the registered office within 10 working days of incorporation and this will allow you to register for online filing. If the company proposes to start trading, you will need to register with HMRC for corporation tax and potentially VAT depending on your expected turnover.
Important reminders when setting up a limited company
- The responsibilities and duties of a director are very important, failure to comply with statutory duties can result in a fine and/or imprisonment. You can find more information online at gov.uk. Even if you set up a limited company, there are some circumstances where directors may be held personally liable.
- Each year the Company must file annual accounts and a Confirmation Statement, failure to comply with these filings can result in a fine or the Company being struck off the Register.
- Incorporating yourself using the above methods are unlikely to be appropriate for complex company structures, groups of companies or where there are different classes of shareholders and you should consider taking legal advice if you are unsure.
Legal advice for setting up a company
If you want to set up or start your own company, a corporate law solicitor can help you through the process. A solicitor can help you decide what type of company is right for your needs, and ensure that your application is submitted properly.
If you have any questions, would like bespoke company articles of association prepared for your company or need other legal support in setting up your company please do not hesitate to contact our Corporate and Commercial Team on 0800 013 1165.