Incorporating a limited company: A guide

Incorporating a limited company can be time-consuming and complicated. However, registering at Companies House can save you tax and limit your legal liability.

Forming your company

Before you register you must have a Memorandum and Articles of Association.

Articles of Association lay out the governing principles. Shareholders and "officers" (directors or company secretaries) have to agree to these principles when running the company. For example, they will include rules about how decisions that affect the company must be made. Additionally, the role that the shareholders and directors play in those decisions.

Most companies use standard ("model") articles - but you can change these or write your own as long as the principles are legal and well-drafted.

Once you have your Memorandum and Articles of Association the next step is to register at Companies House.

Registering with HMRC

Once you have incorporated you must then register with HMRC for all appropriate tax services.

Corporation Tax is automatically set up when you register at Companies House. Corporation tax is the only tax service you are obliged to deal with if you are earning under £79,000 and are not employing anyone.

HMRC will send your company’s Unique Taxpayer Reference to your registered office address, usually within a few days of the company being registered (incorporated).

If you are going to be paying an employee or employees you will have to register for PAYE.

You can also voluntarily register for VAT if you are under the threshold. However, once you reach £79,000 of turnover you must be VAT registered.

When registering for VAT you need to decide whether you intend to opt for cash or accrual accounting and whether the flat rate scheme would be beneficial. We can help you with these calculations.

Appointing Directors

When you register your company it must have at least one director.

A director must be older than 16 and not be someone disqualified from being a director. You can also make another company a director - but at least one of your company’s directors must be a real person.

Directors have responsibilities that include making sure the company is run properly and have a duty of care towards the shareholders (whom they effectively represent).

Allocating shares

When a new company is formed, the number and value of shares need to be determined.

The value of the shares is entirely nominal given that the company has no value on incorporation. Typically, you might issue one hundred shares of a nominal value of £1.

Our advice is to allocate plenty of shares. Just in case you need to sell or transfer any of the share capital in the future.

There is also the option to allocate different classes of shares with different control and voting rights. This tends to get a bit technical but can be worth it if you have a mixture of passive and active shareholders.

Salaries or Dividends

Only shareholders are entitled to draw dividends from the company.

In most small businesses the directors are also shareholders, so many small business owners choose to pay themselves a salary of approximately £10k which uses up their tax-free personal allowance, and then take any additional remuneration as dividends.

Strictly speaking, all Directors require contracts of employment or service agreements documenting their terms of engagement with the company.

Opening a Business Bank Account

You can only open a business bank account once your business has been incorporated and you have received notification from Companies House to this effect.

Most banks then require proof of address and identity (in two separate documents) for each of the directors.

We offer a special Signatory Service for overseas investors and non-UK residents who need a UK business bank account.

If you would like to know more about opening a business bank account in the UK then read our article on "How to open a UK business bank account".

Sound complicated? We're here to help

If this all seems too much then we would be more than happy to guide you through the process.

Equally, if you aren't sure whether you should incorporate or set up as a sole trader, then why not try our 60-second quiz?

At Accounts and Legal, we have a Company Formation Package designed to take care of all aspects of setting up a limited company for you.

If you would like to discuss this with us then please contact our accountants today.