How to set up a limited company
Whether you’re starting a new business or looking to grow an existing sole trader operation, you might be thinking about setting up a limited company.
If so, it’s important to know what the requirements are. What is a limited company, legally-speaking? And what’s involved in setting one up?
In this guide, we explain everything you need to know about how to set up a limited company – and provide a simple checklist to keep you on track.
What is a limited company?
A limited company is a type of business that is legally and financially separate from its owner(s). Being ‘limited’ means there’s a limit to the amount of debt each owner can be held responsible for if the business fails.
When you register with Companies House, you become a director and an employee of the new company. Any profit the company makes belongs to the company itself, not to you personally.
Why set up a limited company?
Setting up a limited company is a hugely popular way to run a business – nearly 900,000 new limited companies were formed in the UK in 2023/24.
As you compare the pros and cons of being a limited company vs sole trader, three potential limited company benefits will jump out:
- Limited personal liability for business debts
A sole trader has unlimited financial responsibility for their business, which means all their personal assets are at risk if they run into trouble.
In contrast, a limited company director is only liable for any debts up to the amount they’ve personally invested in the business.
- New clients and funding could be easier to win
Lenders, investors and potential clients may feel more confident dealing with a limited company as opposed to a sole trader.
Better access to funding and new business is a common driver for incorporating, and for converting from existing sole trader to LTD.
- Pay, tax and pensions rules might be favourable
As a self-employed sole trader, any money you make is your personal income. You’re not an employee of the business; you are the business.
But a company director is an employee (and usually a shareholder), which opens up more tax-efficient options for both pay and pensions.
Looking to incorporate? Here’s how to create a limited company.
Checklist for starting a limited company
Registering a limited company online is a pretty straightforward, step-by-step process. Here’s everything you need to register a limited company.
✔️ Choose your company type
Most people who start a limited company will form a private company limited by shares, with ‘Limited’ or ‘LTD’ at the end of its name.
Only certain individuals can own the company’s shares, and after-tax profits can be paid to these shareholders via dividends.
But this isn’t the only type of limited company you can start, so it’s important to understand which type is right for your needs.
These are the other types of limited company:
Private company limited by guarantee (CLG)
CLGs are similar to LTDs but they don’t have shareholders. Instead, they have members – or ‘guarantors’ – who agree to cover a certain amount of debt if the company fails. Any profit must be reinvested back into the company.
This structure is used mainly by non-profit organisations such as charities.
Public limited company (PLC)
In a private company limited by shares, share ownership is usually restricted to close family, friends and carefully chosen investors.
But shares in a PLC can be bought and sold on the stock market at any time, by any member of the public – including other companies and investment funds.
Community interest company (CIC)
CICs exist primarily to benefit their communities rather than shareholders. They can be limited by shares or by guarantee, depending on whether or not you want investors to receive dividends.
You need approval from the CIC regulator to set up this type of business. Find out more at the GOV.UK website.
✔️ Choose a company name
There are rules about what you can call your company, and your company name must not be the same as – or too alike – those of other businesses in your industry.
It is possible to change your company name later, but it will cost you £20 to do so (or £83 if you need a same-day change).
Run a company name check to see if yours is available.
✔️ Register a company address
You must provide a registered company address for the Companies House public register. If your company is home-based and you’re worried about privacy, consider using a virtual office address.
You’ll get a real office address to use for registration, invoicing and official correspondence – with mail forwarding often included. You won’t actually work at this address, but you will keep your privacy intact.
✔️ Appoint a company director
You must name and provide personal details for at least one company director who will run the business.
If you’re starting up alone, you will be the sole director of your company, but you can name multiple directors if you’re running your company with others.
✔️ Choose your shareholder(s)
You must name and provide personal details for at least one company shareholder. In small companies, the shareholders are often the directors – but they don’t have to be.
If you’re setting up alone without any other shareholders, you will be the sole shareholder with 100% ownership of the company.
✔️ Provide the documents needed to set up a limited company
During the set-up of your company, you’ll need to provide two official documents: the memorandum and articles of association.
The memorandum of association tells Companies House that you want to form a company, and the articles of association explains what the company does and the rules it will be governed by.
If you’re not sure how to prepare these documents, don’t worry. Companies House provides standard templates, or ‘models’, that you can use during the online registration process.
✔️ Register your company
Once you have the information above, you’re ready to register. You can do this directly with Companies House – but you don’t have to. Instead, you can use an authorised formation agent, like Tide.
Here are three great reasons to register your company with us:
- You’ll save £35 – it costs just £14.99 to register your company with Tide, but Companies House will charge you £50.
- You’ll tick off other tasks – with us, you can set up a virtual office address and website domain while you register.
- You’ll get a free business bank account – we’ll open a no-monthly fee Tide account for you at the same time.
Here’s why this last point is important to your new company.
✔️ Open a limited company business bank account
As a limited company director, you have a legal duty to keep your personal and business finances separate. The only way to do this properly is to open a business bank account in your company’s name.
The benefits of having a separate business bank account include:
- Enhance your credibility and image
As mentioned above, established businesses like to know they’re dealing with a credible company. A business bank account projects a more legitimate, trustworthy image.
- Boost your ability to secure funding
A good business credit score and transaction history is crucial for securing funding and investment. Having a bank account in its own name helps your company build this track record.
- Simplify your tax and financial admin
Filing tax returns and company accounts becomes a lot easier when you don’t have to manually separate a year’s worth of business transactions and expenses from your personal ones.
And finally, before we wrap up, here are some post-company formation tasks to take care of.
✔️ Register for tax and PAYE
When you form a limited company, you create a new employer. This means you almost certainly need to register for PAYE – even if you’re its only employee.
Also, any profit your company makes will be subject to Corporation Tax. After formation, log into your HMRC business account and check that Corporation Tax services have been added.
✔️ Apply for any business licences or insurance you need
Certain businesses must register with their local authority or industry regulator – and get a permit, licence or certificate – before they launch.
Check if you need a business licence at the GOV.UK website.
If your company employs people other than you or your close family, you may also be legally required to have employers’ liability insurance. Find out more at the Health and Safety Executive website.
Depending on the nature of your business, you may want to consider other types of insurance such as public liability insurance, or professional indemnity insurance.
✔️ Start keeping the right company records
You’re legally required to keep certain company information for at least 6 years after the tax year it relates to, including records about:
- the company itself, as well as its directors and shareholders
- people who ‘control’ the company (ie own more than 25% of it)
- accounting, including all money spent, received and owed.
You could be fined up to £3,000 if you fail to keep the right accounting records for your company. Find out more at the GOV.UK website.
How much does it cost to form a limited company?
It costs £50 to form a limited company with Companies House – or just £14.99 if you register your company with Tide instead.
How long does it take to set up a limited company?
It takes around 10 minutes to complete our online company registration form. Companies House usually issues your certificate of incorporation the next business day, and you can start to trade as soon as you have it.
Wrapping up
That’s a lot of information about how to set up a limited company. But hopefully it’s answered your questions and helped you get ready to register.
Head over to our company registration page when you’re ready to get started, and we’ll open your Tide business bank account for you at the same time.
