Setting up a limited company: what you need to know

A limited company (also known as a ‘limited liability company’, LLC, or ‘company’) is a type of business structure where the company has a legal identity of its own, separate from its owners.

When a company is considered a separate entity, it protects you as the owner in the case of legal issues. If required, the damages would be rectified through your limited company’s funds, not your own personal finances.

Limited companies are popular in the UK because companies command more prestige in the public eye, as well as with banks, which may be more likely to lend to a company than to a partnership or sole trader. A limited company is also the only company structure where you can sell shares and have shareholders that help the business stay strong and grow.

So how do you set up a limited company? Here’s what you need to know:

Advantages of setting up a limited company

While the use of the word ‘limited’ sounds restrictive, it is only a minor negative in this instance. It only means that, in terms of the law, your company has not yet gone public. This is a step up from being limited, and a momentous achievement for the 1% of companies that make it to that level of shareholder freedom, usually through the help of venture capital and series C funding. 

There are many advantages of setting up a limited company, which include: 

Protection from personal liability for business debts

Setting up a limited company is often considered one of the safer company structures because there is less financial risk if the business fails. 

Again, the word ‘limited’ in these business structures actually works in your favour here. It means you have increased protection of your personal finances against lawsuits or bankruptcy. You would not have to worry about using any of your own personal finances to bail out your business or cover its legal costs.

Easier access to financing and investment capital

Most business establishments that you may want to work with in the future, such as banks, favour registered companies over sole traders. This is because companies carry a larger perception of professionalism and longevity.

Tax advantages (e.g. lower corporation tax rate than sole traders)

While sole traders pay 20-45% in Income Tax on profits, and pay classes 2 and 4 National Insurance, limited companies usually pay 19% Corporation Tax. They also don’t have to pay National Insurance and benefit from expensing relief. 

An easier structure to employ more people

Technically, you can employ as many people as you want – even as a sole trader. However, when doing so as a limited company, the process is a better option to avoid any complications, and to manage the taxes and benefits you are required to give employees by law.

Ability to attract key personnel with attractive pay packages, including salary and dividends

With a company comes prestige and implies long-term intention. This can make it particularly attractive to employees or investors, who you can attract by offering a salary, but also shares in the company, which are expected to grow in value over time.

Downsides of having a limited company

More paperwork and accounting requirements than other business structures

A limited liability company has more moving parts than setting up as a sole trader. These include having to choose a business name (which sole traders don’t necessarily have to do), and potentially having to hire a solicitor to ensure that you fill out forms correctly. The latter is especially important when recording the details of the director, company secretary, and other people of significant control, such as guarantors or shareholders.

The accounting may also be more complicated and may require the services of both a qualified professional accountant and some quality accounting software, ensuring that your company is compliant with the current MTD rules that came into effect on April 1, 2022 for certain businesses.

Increased costs of setting up a limited company

You will be required to pay an incorporation fee to Companies House, which differs slightly depending on the method you choose to use:

Risk of personal liability for directors in certain circumstances

While your personal finances are protected when you become a director of a limited company, there are some businesses that either don’t like this idea or require more assurance if, for example, you are to take out a loan with them. 

Technically, a business owner could open a business as a way of securing bigger loans, then immediately close it, leaving the lenders uncertain and out of pocket. This doesn’t happen often because it can severely impact a director’s reputation. Some lenders have introduced new measures to try to mitigate this practice.

If your company takes on any borrowing, then the lender may place a personal guarantee on the directors of the business. So, if the business is unable to pay back the loan, then the directors will be personally liable to pay back the loan.

This will be clarified on a case-by-case basis between you and a lender. In certain cases, an agreement for the reassurance of a lender is something you could choose to offer as a director, rather than a legal requirement.

Possibility of double taxation on dividends paid to shareholders

According to Investopedia: “If the company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders.”

This happens first when a shareholder receives the dividends, then again at the end of the tax year when shareholders are taxed for their earnings overall. This happens because shareholders are technically considered owners of the company as well. 

While shareholders would not have to pay tax on any dividend income that falls within their Personal Allowance (capped at £12,570 as of 2024), this system has been widely criticised among business owners and shareholders alike due to this inconvenience.

How to set up a limited company

Here’s a list of the information you’ll need to provide to Companies House, or a formation agent, when you start a company:

Step one: register the company with Companies House

Create an account (email address, name, and password) on Companies House, along with your chosen company name (which we’ll talk about in more depth, later), and a UK postal address. 

You’ll also need to describe what your business or ‘business activity’ will be about at this stage. This means stating what your business does by assigning a standard industrial classification of economic activities (SIC) code.

You can add up to four SIC codes per company, and you can change these at a later date. Read more about what a SIC code is and the different types of SIC codes here.

Step two: obtain a Unique Taxpayer Reference (UTR) number from HMRC

If you’ve set up a limited company, you’ll need a UTR number for the business, so that HMRC can identify your company and what you owe in tax each year. Like a personal UTR, a company UTR is 10 digits long and will be issued to you when you register.

You can request your Corporation Tax UTR online, and HMRC will send it to the business address that’s registered with Companies House within 10 working days.

Step three: set up a business bank account

Business bank accounts are necessary for keeping business transactions and accounting records organised, processing employee salaries, and receiving credit and debit card payments. They are also essential for lending and support.

As a limited company, you are legally required to have a business bank account, as your business is a separate legal entity and the money it generates must be handled separately.

This means any transactions, debts, and taxes will be in the business’s name instead of yours.

Banks impose strict terms on how you can withdraw money from your limited company. You can:

• Take a salary
• Take dividends
• Claim back expenses you’ve personally paid

A business bank account will enable you to set up a method that works for you, and ensures you stay on the right side of the law.

Step four: register for relevant taxes (PAYE or VAT)

Companies can additionally register for PAYE or VAT according to their future goals and needs.

You have to pay VAT if your business profits have exceeded £85,000 (as of 2022). However, you can also register for VAT voluntarily, if you predominantly work with businesses that are already registered. Some companies do this in the knowledge that any VAT they are charged can then be recovered.

There is no VAT registration cost – the whole process of registering for VAT on the HMRC website is free.

However, when it comes to filing your VAT return, there are optional ways of doing it that can add to your costs.

If you wish to hire an accountant to complete your return you’ll be paying for their professional services, or if you want to file your own VAT return, it’s helpful to use some quality accounting software. 

As for PAYE, this is the tax you have to register for if you are planning to hire employees. 

According to HMRC: “PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment. You normally have to operate PAYE as part of your payroll.

You do not need to register for PAYE if none of your employees are paid £123 or more a week, get expenses and benefits, have another job or get a pension. However, you must keep payroll records.”

Check out HMRC’s Introduction to PAYE for more information on what needs to be included in your payroll year end for 2024/25.

Step five: appoint members of the board, including directors and shareholders (if any)

You’ll then need to appoint at least one director. The director is the person who is legally responsible for running the business and ensuring that reports and company accounts are prepared. You can add additional directors, who must be aged 16 or over.

Each director must have two addresses associated with them:

1. A publicly available official service address
2. A residential address which will not appear on the public record.

If the service address is the same as the company address, you’ll need to add an alternative residential address.

Finally, you’ll need to confirm that the person named has agreed to act as a director for your company by attaching a letter of consent to your application form.

Required documentation for a limited company

1. Unique company name

If you’re a sole trader, registering a business name isn’t compulsory. However, if you’re launching a private limited company, then you are legally required to register a business name.

Start by using the Company Name Availability Checker to make sure your ideal name isn’t taken or too similar to an existing company’s name.

Then, you register the name with Companies House. Your company name needs to be registered to one in order to have somewhere for official notifications to be sent.

The company name does not have to be the same as the name you trade with – the latter is known as your ‘business name’.

2. Registered office

This is the official address for the company and must be based in the UK. However, the company need not trade from or even have anyone based at the address, as long as government mail is forwarded to the company directors.

3. Director name(s)

The person or people tasked with running the company are its directors. A company must have at least one person acting as the director. The following information is needed when appointing a director:

• Name
• Date of birth (the month and year is on the public register; the day is not)
• Nationality
• Occupation
• Country of residence
• Service address (similar to the Registered Office, this is the director’s ‘official’ address

Residential addresses are not put on the public register unless the address is also being used as the service address.

Note: Corporate Directors

While a company can’t be a director of itself, another company can be appointed as a director (as long as at least one person has been appointed, too). The following is required when appointing a corporate director:

• Company name
• Authorising person’s name
• Address
• EEA/Non-EEA
• Country registered
• Registration number
• Governing law
• Legal form

4. Shareholder name(s)

The person or people who own the company are its shareholders. A company limited by shares can be formed with one person acting as both the director and the shareholder. To appoint a shareholder you will need the:

• Name
• Address
• Allotment of shares

Note: Corporate Shareholders

A company can’t be a shareholder of itself, but another company can be a shareholder. When appointing a corporate shareholder you will need the:

• Company name
• Authorising person’s name
• Address
• Allotment of shares

5. Standard Industry Classification Code (SIC)

A SIC code is a five-digit number that outlines the industry in which the company will be categorised. You can view a list of these codes here. Not sure what industry you’ll be working in yet? Simply use the code 82990 (other business support service activities). You can update this code when filing a confirmation statement.

6. People with significant control

This was introduced as part of the Small Business, Enterprise and Employment Act 2015. The aim is to increase transparency in businesses by showing who really owns and runs a company. According to the government, a person with significant control is anyone who:

• Owns more than 25% of the company’s shares
• Holds more than 25% of the company’s voting rights
• Holds the right to appoint or remove the majority of directors
• Has the right to, or actually exercises significant influence or control
• Holds the right to exercise or actually exercises significant control over a trust or company that meets one of the first four conditions

For each person with significant control, you will need to document their name, date of birth, nationality, occupation, country of residence, and service address (residential address is not on the public register unless the address is also being used as the service address). You will also need to document the nature of control.

Note: Company secretary

This is an optional appointment, to be taken by the person who will be responsible for various admin tasks (this can be you). If you do decide to appoint a separate secretary, you will need to document their name and their service address.

7. Memorandum & Articles

This is the set of documents that outline how your company will be run. If you decide to form your company with a formation agent, they can provide you with Memorandum & Articles that suit the majority of companies.

How shareholding works with limited companies

A shareholder is a person, company, or institution that buys into a company in exchange for a stake in the future equity of the company. 

Shareholders are essentially purchasing a percentage of the company. Due to this, it is not as simple as collecting profits each month – the title of ‘member’ that comes with purchasing a share comes with certain rights and responsibilities.

If you have a cofounder, it will be good practice to split the shares 50/50 to make things better and to avoid complications or disagreements further down the line.

However, if you are the only founder it is up to you how you decide to split shares. The most common way is to use percentages and issue more shares whenever a new shareholder purchases shares, in order to prevent unfairness or dilution. 

As an example, no matter how many new shares there are in total, the people who purchased ‘40%’ will always have their 40%.

Shareholders who hold shares will also have a percentage of the company’s voting rights. This is very important when considering how much percentage to give a shareholder, because it gives them significant influence in the company. You never want someone to have more shares than you as a company owner because, in a worst-case scenario, it would mean that a shareholder could potentially use their majority to vote you out of the company.

This is why on investment TV shows, such as Dragons Den, contestants or business owners are so reluctant to give away more than 40% at most – and never 50% or more.

There is good news, however: shares can be transferred or bought back if a shareholder is no longer interested in holding them for a certain company.

The legal requirements of any limited company (and therefore the things you must do as a minimum requirement) are as follows:

• Company name: According to Gov UK, your company name cannot be offensive. It also cannot contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get express permission for this.
• Filing of company accounts and annual returns: All limited companies have to file statutory accounts with Companies House within nine months of the end of your company’s financial year. They also have to submit detailed end-of-year accounting records to HMRC, plus their corporation tax return. These are submitted online within 12 months of the end of your company’s financial year. 
• Appointing an auditor (if required): The directors will be the ones to appoint the first auditor of the company. They then hold office until the end of the first meeting of the shareholders, at which the accounts are laid before the members. The accounts are reviewed again at the end of every business financial year. 
• Insurance requirements: There are certain conditions in which insurance is a legal requirement. For example, if anyone works for you, you will need employers’ liability insurance. You may also need insurance if you want to become a member of certain trade organisations as it is also a requirement in that aspect, too.