Company Formation is the first step on the exciting journey of setting up a new business. Whether you’re completely new to running a business, or perhaps you own a few businesses, working out how to set up a new company in a way that works for you is a vital first step.

Incorporating a company is the legal process of creating a business and making it a separate entity from yourself.  It carries many benefits, which lucky for you, we’re going to explore in this article, along with the other things business owners need to consider when incorporating a business.

Company Formation: Step-by-Step

Put in simple terms, company formation is the legal process of legally creating a new business. Incorporating a company makes a business a distinct legal entity that’s separate from its owners, allowing it to exist independently. This means the new business must follow certain laws and regulations which offer the owners a layer of protection. So, what are the actual steps involved in incorporating a company?

 

1. Choosing a business structure – the first step is deciding what structure works best for you depending on what your goals are, and how you want to be structured. The most common options are:

• Limited Company (ltd): a popular choice for SMEs, becoming a Limited Company offers limited liability for business owners.
• Sole Trader: although this isn’t technically a company, sole traders are self-employed people, however you can still employee other people. The negative side of this, is that you remain personally liable for any business debts.
• Limited Liability Partnership (LLP): a partnership structure offers similar limited liability to a limited company. Each partner who invests in the company, is only liable for the amount they invest in the business, similar to how shareholders operate in a limited company.
• Public Limited Company (PLC): this structure is designed for larger companies that hope to raise funds by selling shares to the public. By selling shares, the business has access to large investments, however the regulatory requirements associated with this may be off-putting to some.

2. Pick a Name – the process of picking a name might be exciting to some, to others it might be more difficult. Whichever side of the fence you sit on, choosing a name is an essential first step of incorporating a new business. Unfortunately, it’s not just as simple as picking a name that you like. Before you do that, you’ll need to ensure no one has the same name or one that sounds too similar. Pick a name that reflects your business, is unique to you, and fits Companies House’s naming policy. You can check if your business name is available on Companies House’ Company Name Availability Checker.
3. Choosing a Registered Office Address – every business must have a registered office address where official documents and any other post will be sent to. This doesn’t have to be an office that you own, or your home address, so don’t worry if you don’t have your own premises. For example, we offer a registered office service, where many of our clients use our premises as their registered office, and we manage their post.
4. Appointing Directors and Shareholders – a company must appoint at least one Director who is legally responsible for running the business. It’s the Director’s responsibility to file annual accounts, stick to all the legal elements of running a business and adhere to corporate governance standards.
5. Get your company formation documents ready – this step typically involves preparing the necessary documents you’ll need to start a business, including the articles of incorporation and the articles of association. This formalises how you intend the business to be set up in terms of structure and how it operates, something newbies often seek professional advice on. Once these documents are prepared, they must be submitted to HMRC.

A company is officially in operation once these steps are taken, however as any business owner knows, this is only the tip of the iceberg. There are plenty more opportunities for business planning, tax saving, cashflow forecasting and more, and the benefit of doing this from day one can be hugely beneficial for business owners.

Benefits of Company Formation

So why do people set up businesses? Why not continue as a sole trader for the rest of eternity? There are many reasons, but one of the most important is that it provides a layer of personal protection for business owners. Here’s why;

The Protection offered by Limited Liability

When a business is incorporated, it becomes a legal entity separate from the owner. This separation protects the owner or shareholders’ assets (think house, car, savings) from any business debts that they would otherwise be liable to pay from their own pocket. Straight away, this reduces the financial risk of setting up a business by limiting any financial loss to within the company. This is particularly appealing to small businesses or startups, or businesses in industries with high set-up costs such as Construction or Manufacturing. From an outsider’s perspective, this also gives reassurance to investors or other funding sources who see it as a sign of legitimacy, which makes your business a far more attractive prospect.

To find out the options for funding out there, check out recent blog which explore the topic.

Building credibility

The process of building trust and credibility in your company takes years and encompasses everything from branding and marketing to perfecting your service offering. However, setting up a company is a sure-fire way to set off legitimately.

From the perspective of a potential customer, a business with an address, business name and bank account automatically creates a sense of trust. This too goes for potential suppliers or businesses who you may work with. Many larger businesses and governmental agencies will lean towards incorporated businesses as a sign of credibility and long-term stability.

Banks and investors are also often more willing to lend to formal companies which could be hugely beneficial if that’s the trajectory your business is on.

 

Tax Advantages of Incorporating a Company

Corporation Tax – if you’re a limited company in the UK, you could benefit from corporation tax rates, which may in some instances be lower than individual income tax rates for sole traders. In previous years, corporation tax has been more favourable compared to higher income tax rates on sole traders or partnerships, which is something for business owners to consider.

Read More: 11 Ways to Reduce your Corporation Tax

Dividend Payments – Shareholders in a limited company can take dividends as well as a salary, offering a tax-efficient way to withdraw income. Dividends attract lower tax rates than regular income, enabling shareholders to optimise their tax position.

Find out more in our guide to limited company dividends.

Tax Deductible Expenses – another benefit of setting up a business is the number of business expenses that can be deducted from the company’s taxable profit.  So, when you spend on things like office supplies or travel for work, you can report these as deductible expenses, which helps reduce the amount of income you pay tax on.

Retained Earnings – UK limited companies can retain profits within the company, which can be reinvested for future growth. This flexibility is particularly beneficial for companies scaling or entering new markets.

Succession Planning: With share issuance, limited companies offer an efficient way to transfer ownership, making it ideal for succession planning. Share transfers and issuance are tax-efficient, and it’s possible to bring in new shareholders without complex restructuring.

Access to International Trade: Incorporation can make it easier to establish cross-border operations and trade relationships, especially within the European market. The UK’s trade laws support limited companies in securing import/export permits and setting up international subsidiaries.

Ease of Compliance and Management: The UK’s company law provides clear guidelines for limited companies, simplifying compliance and governance. Companies must register key documents with Companies House, which ensures that they operate within the legal framework and provide transparent operations.

Attractive Employee Benefits and Stock Options: Limited companies can offer employees competitive benefits like pensions, stock options, and other incentives, which can improve recruitment and retention. Additionally, Enterprise Management Incentive (EMI) schemes allow companies to offer tax-efficient share options to employees, enhancing loyalty and performance.

A guide to the Enterprise Management Incentives (EMI) scheme for start-ups

Director Loans and Investment Flexibility: In the UK, limited company directors have the option to make director’s loans, allowing them to withdraw funds or repay loans in a tax-efficient way. This structure provides financial flexibility for owners and directors, a significant benefit for small businesses and startups.

Types of Company Structure

The company structure you choose very much depends on your eventual goals and what you want from your business. In this next section, we explore the pros and cons of the different business structures to give you an idea of where to start.

Sole Trader (Sole Proprietorship)

• What is it? A sole trader is the most straightforward type of business structure, where one individual owns and operates the business. It’s ideal for freelancers, small business owners, or anyone starting a business with minimal setup.
• The Good:
  • Full Control: The owner makes all decisions and has complete control over business operations.
  • Low Startup Cost: There are minimal registration fees, and the setup process is straightforward.
  • Simple Taxation: Income is taxed as personal income, and the owner only needs to file a Self-Assessment tax return. Nice and easy.
• The Bad:
  • Unlimited Liability: There’s no legal separation between the business and the owner, so personal assets can be at risk if the business incurs debt. Whoops…
  • Limited Growth Potential: Since it’s a single-person structure, it can be harder to raise capital and grow the business which can pose issues.
  • Less Credibility: Unfortunately, some clients and partners prefer working with incorporated entities, which may appear more credible than sole proprietorships.

 

Partnership

• What is it?: A partnership is a business structure where two or more individuals share ownership, decision-making, and profits. Often, partnerships are popular with professionals like lawyers, doctors, or family-owned businesses.
• The Good:
  • Shared Responsibility: Partners can divide responsibilities, workload, and expertise, making the business easier to manage.
  • Combined Resources: Partners can pool financial and operational resources, making it easier to start and maintain the business.
  • Simple Structure: The setup and tax obligations are straightforward, with partners typically taxed on their share of profits through personal tax.
• The Bad:
  • Unlimited Liability: In a general partnership, partners are personally liable for the business’s debts. Each partner can be held responsible for the entire debt if another partner cannot pay.
  • Potential for Disagreements: Shared control means disagreements can happen, which could affect business decisions and growth. However, this is a part of running any business with more than one person (and unfortunately a part of life!).
  • Limited Growth: Like sole traders, partnerships may face challenges raising capital or gaining a formal business structure’s credibility.

 

Limited Liability Partnership (LLP)

• What is it? An LLP is a hybrid structure that allows the flexibility of a partnership while providing limited liability protection. It is commonly used by professional services firms like accountants, law firms, or consultancies.
• The Good:
  • Limited Liability: Partners in an LLP are generally protected from personal liability for business debts, similar to a limited company.
  • Flexible Management Structure: LLPs allow partners to divide profits and management roles in a way that suits them.
  • Tax Transparency: Profits are shared among partners, who are taxed individually, allowing for flexibility in handling taxes.
• The Bad:
  • Public Disclosure: LLPs must file annual financial statements with Companies House, making financial information publicly available.
  • Complex Setup: Setting up and maintaining an LLP requires more formalities and compliance than a general partnership.
  • Less Suitable for Non-Professional Businesses: LLPs are generally best suited for professional services firms and may not be ideal for other types of businesses.

 

Private Limited Company (Ltd)

• What is it?: A Private Limited Company (Ltd) is a separate legal entity that provides owners (shareholders) with limited liability. An Ltd company must be registered with Companies House and follow specific regulatory requirements.
• The Good:
  • Limited Liability: Shareholders are only liable for the amount they invested, protecting personal assets from company debts.
  • Professional Image: Private limited companies often appear more credible to clients, partners, and investors, enhancing business reputation.
  • Tax Efficiency: Corporation tax may be lower than income tax rates for individuals, and profits can be paid out as dividends, which often have tax advantages.
• The Bad:
  • Strict Compliance Requirements: Private limited companies must follow regulations like filing annual accounts, keeping shareholder records, and maintaining director information.
  • Public Disclosure: Financial statements and director information must be filed with Companies House, which can be accessed by the public.
  • Additional Costs and Formalities: There are more fees, such as incorporation costs, and formalities, including appointing directors and maintaining records.

 

Public Limited Company (PLC)

• What is it?: A Public Limited Company (PLC) is a limited company that can sell shares to the public and is typically larger in scale than a private limited company. PLCs must meet strict regulatory and financial requirements and are required to have at least two directors.
• The Good:
  • Access to Capital: By listing shares on a stock exchange, a PLC can raise significant capital from the public, which can fuel rapid growth and expansion.
  • Limited Liability: Like other limited companies, shareholders are protected, only being liable for their investment in the company.
  • Enhanced Credibility and Recognition: A PLC has high visibility, often making it attractive to large clients, investors, and the general public.
• The Bad:
  • Strict Regulatory Compliance: PLCs face significant regulatory requirements, including mandatory audits, minimum share capital requirements, and extensive reporting.
  • High Setup and Running Costs: Incorporating as a PLC is costly, and maintaining compliance with public company regulations requires substantial administrative resources.
  • Public Scrutiny: As a PLC, financial and operational details are public, which means the company’s performance and decisions are closely watched by shareholders and regulators.

 

Each of these business structures brings its own advantages and disadvantages which business owners must navigate depending on their goals and what kind of business they intend to run.

Choosing the right structure is crucial for balancing your liability, managing tax efficiently and setting yourself up for the future. The process of making that decision however, can often be confusing, which is why it’s important to speak to an accountant or a legal advisor beforehand (or even better, a firm that does both). To speak to one of our team about what structure suits your goals, get in touch.

Legal Requirements for Company Formation

Starting a company can feel like a confusing maze of rules and paperwork, but understanding the main legal requirements makes it much easier.  In this section, you guessed it, we’re going to break down each legal aspect of incorporating a business so you know exactly what to expect, why it’s necessary, and how to get it done properly.

Company Name Registration

First things first, that all important name and making sure it’s available. Maybe the name was the inspiration for your business, or maybe it’s just a necessary box ticking exercise. Either way, you’re not going to get very far without one.

Your company name needs to be unique and meet specific legal criteria to be accepted by Companies House. What do we mean by that? Well, it means your name can’t contain any offensive or sensitive language, be misleading in any way, or be too similar to another business.

• Tips for Choosing a Unique Name: Start by brainstorming a few options and check that each name isn’t already in use. Make sure the name stands out without being too alike an existing company, if it doesn’t you could risk rejection (and no one wants that). Aim for something memorable, simple, and reflective of what your business does – it makes a great first impression and builds brand recognition from the get-go.
• Ensuring Trademark Availability: Just because a name is available with Companies House doesn’t mean it’s free for you to use everywhere! This is an important point. Trademarking protects your brand legally, stopping others from using your name or logo in a similar field. You can conduct a quick search on the Intellectual Property Office (IPO) website to see if your name is available for trademarking – or let us do the heavy lifting for you!

 

Registered Address and Office Setup

Every UK company needs a registered office address where official documents from Companies House, HMRC, and other authorities can be sent. This doesn’t have to be where you work day-to-day (especially if you’re running a business from home), but it does need to meet certain criteria.

• Importance of a Registered Address: The registered office address will be public information, so many companies opt to use a professional or virtual office address for privacy. It’s essential that it’s an actual location (no P.O. boxes), where official letters and notices can be received during regular business hours.
• Legal Requirements and Options (Including Virtual Offices): You can choose any UK address as your registered office, but it must be in the same country as where you registered (so, if you’re in England, your address has to be in England or Wales, simple really). If privacy is a concern, virtual office providers can act as your registered address and forward any mail to your chosen location. This gives your business a professional image, even if you’re not based at a physical office.

 

Think carefully before you do this, if you’re running a business from home do you really want all of your business post to be sent there? If you don’t have a premises, you can use other firms as your registered office. They simply register their business to one of our offices, and we manage their post for them, keeping them in the loop, discarding any spam and sending them the important stuff.

 

Director and Shareholder Requirements

If you’re running either a Private Limited Company or a Public Limited Company, you’ll need to assign at least one director and determine who your shareholders will be. These people will have specific roles and responsibilities, so it’s important to choose wisely and understand exactly what’s needed from them.

• Rules for Appointing Directors and Shareholders: Every UK company must have at least one director who is over 16 years old. Directors are legally responsible for the company’s actions, so you’ll want to pick someone reliable and committed. If you’re a sole trader moving to a limited company structure, you can act as both the sole director and shareholder – giving you control while separating your personal and business liabilities.
• Minimum and Maximum Limits, Residency Requirements: You only need one director to get started, but there’s no upper limit if you’re building a board. While directors don’t have to live in the UK, having a UK-based director can simplify communications and legal compliance. Shareholders, on the other hand, own part of the company. You’ll need at least one, and they can also serve as directors. Deciding on share distribution early is key, especially if you have business partners or investors involved.

 

Compliance Documentation

Now we’re getting into the paperwork that makes your company official, the part that every business owner loves. Joking aside, these documents lay the foundation for how your company operates and ensure that you’re fully compliant with UK company law.

• Importance of Memorandum and Articles of Association: These documents are essential when registering with Companies House. The Memorandum of Association confirms the intention to set up the company and the initial shareholders’ agreement to become part of it. The Articles of Association are essentially your company’s rulebook, covering how decisions will be made, how shares are handled, and what responsibilities directors have. You can use standard templates provided by Companies House, or we can help customise them to better suit your specific business needs.
• Statutory Registers and Shareholder Agreements: Once registered, you’re required to keep statutory records, including the register of directors, shareholders, and company secretaries (if any). These must be up-to-date and available for inspection. A shareholder agreement is also highly recommended, especially if you have multiple shareholders. This agreement outlines the rights and responsibilities of each shareholder, what happens if someone wants to leave, and how disputes will be resolved – which helps prevent conflicts down the line.

What is a shareholder’s agreement and why do you need one?

As with most legal services for business it’s always advisable to create something tailored from the start. Although it might be tempting to save a few quid by using one of the many ‘templates’ out there, you could end up paying more righting wrongs in the future. And believe us, we’ve seen plenty of horror stories over the years where business owners have tried to save money.

 

Setting up a business bank account in the UK

Once the business is set up, the hard work begins. However, before you start on your journey, you need to make sure your business is built on steady ground.

In the UK, that means setting up a business bank account, getting registered for your taxes and getting a bookkeeping process set in stone from day one.

Apart from your own peace of mind, it’ll allow you a clearer picture of your business expenses, create a separation between your assets and the businesses’ and make tax calculations that bit simpler.

For most UK banks, you’ll need ID such as a driver’s license or passport, proof of address along with Companies House registration number. You’ll also need to provide your company’s certificate of incorporation, business ownership information, and may be asked for a business plan if applying for additional services.

Banks offer different options for small businesses, so researching fees, services, and features like expense categorisation, invoicing tools, or card payment solutions can help you find the best fit.

Choosing the Right Bank: The choice between traditional high-street banks (like Barclays, Lloyds, or NatWest) and challenger banks (such as Tide, Starling, or Monzo) can affect your experience. Challenger banks often offer easy online setup, lower fees, and integration with digital accounting software, while high-street banks provide physical branches, which can benefit cash-based businesses.

Registering for Tax

Unfortunately, starting a business involves more than just fun and creative tasks like picking names; you also have to do some of the boring official stuff like registering for your taxes.

Corporation Tax Registration – if you’re setting up a limited company then you’ll have to register with HMRC for Corporation Tax within 3 months of starting out. Corporation Tax is applied to your company’s profits however the rate is subject to change so make sure to check with your accountant or check out the HMRC website for the latest news. If you’re a sole trader, corporation tax won’t apply to you, however, you will still have to fill in a self-assessment.

 

Value-Added-Tax – regardless of what structure you choose, VAT applies to your business, however, you have the choice of whether to register if your turnover is less than £85,000 over a 12-month period. Even if your business is under the threshold, you can still register for VAT, which allows you to claim back the VAT on your expenses. If you’re VAT-registered, you’ll have to do a few things:

• VAT-registered businesses must charge VAT on their goods or services
• You’ll also have to submit quarterly VAT returns to HMRC and pay any VAT you owe.

For this reason, it is important that VAT-registered businesses keep accurate records of their transactions, which is something a good accountant should help with.

 

Payroll TAX and PAYE

For any business with employees, it’s also necessary to register for PAYE as this enables you to deduct income tax and National Insurance contributions from employee salaries before payment. To do this, employers must submit monthly payroll reports to HMRC, pay employer contributions and provide employees with P60s, an annual document that summarises their total pay and deductions. This applies to any business structure that has employees, whether you’re a sole trader, partnership or limited company.

 

Annual Filing Obligations

If you’re a limited company in the UK, you must submit an annual confirmation statement to Companies House, that provides basic company information. On top of this, annual statutory accounts must be filed with both Companies House and HMRC to outline your company’s financial performance.

If you’re a sole trader or part of a partnership, you’re generally required to complete Self-Assessment tax returns each year to report business income along with submitting a Class 2 National Insurance contribution.

 

Benefits of working with an Accountancy and Legal firm

As tempting as it might be to go it alone, seeking professional advice at the start of your business journey might just be the best decision you make. Although you’ll save sweet cash doing it all yourself, you may also find the legal, tax and compliance requirements get overwhelming quickly, taking you away from the stuff that matters.

Save Precious Time

We know how long some business owners spend doing day-to-day jobs like bookkeeping, and frankly it’s eye-watering. Would you not rather use that time more wisely working in the business? By outsourcing your accountancy process to an experienced firm, you’ll get all that time back, and you’ll also know it’s been done to a professional standard. Yes, you can try and be a jack of all trades, but knowing when to hand over the reins will help as your business grows and you physically can’t do everything yourself.

Minimise Risk

Working with a team of tax, legal and accounting experts means you’ll have access to all their combined industry knowledge they’ve built over the years. Whether it’s rising or falling rates or new regulations, the world of tax for example is constantly changing, meaning it pays to work with a team who knows their stuff. Not only will they be able to ensure you are operating as tax efficiently as possible, they’ll also make sure you’re not leaving any money on the table, which sometimes can be worth thousands.

More than just compliance

Filing your tax returns and annual accounts is one thing, but providing strategic advice on how to run your business? What more could you want. Fortunately, lots of firms, ourselves included, now offer tax planning, growth strategies, cashflow forecasting, management accounts and more. That way, we become an outsourced finance function to our clients. This means we grow with clients on the journey, providing solid advice, outsourcing the stuff there good at and generally becoming an indispensable part of their business.

Seeking help from professionals isn’t just for large corporations. Even startups and small businesses can benefit from professional guidance, whether for initial formation, tax strategy, or long-term growth planning. Many firms offer scalable services to fit different business needs and budgets, making this support accessible to businesses of all sizes. We work with businesses of all shapes and sizes, helping them get control of their finances and achieve their dreams.

 

Free Company Formation

So, you’ve read the information above and hopefully been convinced by our expertise. Well, this is the part where we shamelessly sell our services and tell you about our free company formation services.

We know that navigating the legal and administrative steps of launching a company can feel overwhelming, especially for new business owners. Our free service handles the essentials—registering your company with Companies House, advising on the best business structure, and assisting with initial setup steps—all designed to help you get started without the usual upfront costs.

Beyond formation, we’re here to help you succeed in the long run. Once you’re up and running, you’ll have access to our team for expert support on everything from bookkeeping and payroll to VAT and tax strategy, so you can grow with confidence. This service isn’t just about removing entry barriers; it’s about giving you a head start with professional guidance, ongoing compliance support, and tailored growth advice. We’re with you every step of the way, ensuring you have the foundation—and future—for a thriving business in the UK.