Forming a Limited Company – FAQ’s
Have you been thinking about forming a limited company from your existing business, but don't understand the pros & cons - well here is a list of frequently asked questions my clients ask regarding the process of setting up and running a limited company. If you have any additional questions, please contact Richard at Cloud Accounting NI.
What is a private limited company?
A private limited company is an individual legal entity which is separate from that of its officers. A limited company has its own assets and liabilities, profits and losses. The liabilities are limited to the Company. In other words, the officers are protected from financial liability should the company encounter any difficulties. This differs from those of a sole trader or partnership, where the assets and liabilities of the business belong to the individuals.
Ownership of a private limited company is established through the division of shares. Unlike a public limited company (PLC), a private limited company is restricted from selling shares to the public. Limited companies must also submit annual accounts to Companies House which are made available to the general public.
Is there more than one type of company?
Yes. There are four main types of company:
Private company limited by shares - this type of company has a share capital and the liability of each member is limited to the amount unpaid on shares that a member holds. A private company cannot offer its shares for sale to the general public. You can set up this type of company by contacting Cloud Accounting NI.
Private company limited by guarantee - in this type of company, members do not make any contribution to the capital during its lifetime as they do not purchase shares. The members' liability is limited to the amount that they each agree to contribute to the company's assets if it is wound up. You can set up this type of company by contacting Cloud Accounting NI.
Private unlimited company - this type of company may or may not have a share capital and there is no limit to the members' liability. Because there is no limitation on members' liability, the company has to disclose less information than other types of company.
Public limited company - this type of company has a share capital and, the liability of each member is limited to the amount unpaid on shares that a member holds. A public limited company may offer its shares for sale to the general public and may also be quoted on the stock exchange.
There are also still a few "companies limited by guarantee with a share capital" but it has not been possible to form these since 1981.
What are the advantages of trading as a limited company?
Perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability. Essentially this protects the personal assets of the officers should the company run into financial difficulties.
Many of the costs and administrative requirements associated with running a limited company are now not much more than those of a sole trader or partnership. Limited companies also instil added confidence in suppliers and creditors; many large organisations will only conduct business with limited companies.
Finally, the ownership of a limited company can easily be divided up through the sale of shares. The shares can be further used as a means of generating capital.
Who can set up a limited company?
Any individual of any nationality may register a limited company subject to a few conditions:
- you're not an undischarged bankrupt
- nor have you been restrained by court order
- and you are not subject to UK government restrictions
I don't live in England. Can I still set up a new company?
Yes. The officers of a company may be resident outside the UK. The registered office address of the company must be situated in England, Wales, Scotland or Northern Ireland.
What information do I need to set up a limited company?
To set up a limited company you will need the following information:
- A unique name for your Company
- A Registered Office address
- At least one Director willing to accept the duties and the responsibilities that go with the post
- At least one Shareholder willing to buy a single £1 share in the company. They can also be a director or secretary.
- One Secretary (optional)
- Key information for each director, secretary and shareholder: town of birth, eye colour and Mothers maiden name.
Choosing a name for your company
The name you choose must not already be registered. Cloud Accounting Ni can perform a FREE search for you. The name most not be deemed offensive, or be associated with the government or local authority. There are also certain sensitive words which must be avoided. Since October 2008, new rules apply that allow complaints to be made where a company has been registered with the intention of extracting money from the complainant or to prevent him from registering a name in which he has goodwill ("opportunistic registration"). These rules also apply retrospectively, ie, to companies registered before October 2008.
Does registration of my company name also mean that my trademark is protected?
No. Company law is different from trademark law. You cannot stop someone using a trademark which is the same or similar to yours merely by registering your name with Companies House.
For further advice on trademark registration phone the UK Intellectual Property Office (IPO) on 08459 500 505 or visit the IPO website.
What is a Registered Office?
The registered office is the official address where all statutory documents from Companies House will be sent. This address will appear on the public records. A PO Box can be used provided the full address is given, including the postcode, and it is validated by the Royal Mail.
Can anyone be a company director?
Under the Companies Act 2006, every company has to have at least one director who is a natural person (or individual). In other words they cannot all be 'corporate directors'. Since 1 October 2008, the minimum age for a director is 16 years old.
What is the difference between shareholders and directors?
The directors are responsible for the day to day running of the company and ensuring it meets its responsibilities and deadlines. The shareholders own the company and have the right to vote on many issues. The extent of ownership and level of voting rights are based on the percentage of issued shares they own. An individual can be both a director and shareholder of a company.
Do I need a company secretary?
Since 6th April 2008, a private company has the option whether or not they have a company secretary. It is no longer a mandatory requirement.
What is Companies House?
Companies House is the Government agency responsible for registering all limited companies in the UK. It is also responsible for storing corporate information on all registered UK companies.
What is a Certificate of Incorporation?
This is an official certificate issued by the registrar on successful incorporation of a limited company. The certificate states the company number, name and date of incorporation.
What are the Memorandum & Articles of Association?
These are statutory legal documents that define how the company is regulated and what protocols it must follow in its day to day business.
From October 2009 a limited company can choose to adopt the Model Articles of Association. The Model Articles where brought in under the final implementation of the Companies Act 2006. The new articles present a clear and concise framework that enable the directors to coordinate meetings, issue shares and pass resolutions (amongst many other things). The documents are drafted in plain English and adopt the "Think small first" approach to managing your company.
Cloud Accounting NI offer a range of solutions to enable you to customise your articles or import your own templates. Please contact us if you would like further information on this.
What are shares and how do they affect a limited company?
Shares are a way of putting capital into your company. They also determine the level of control the shareholders (share owners) have over its operations through voting power.
Deciding how you divide the shares is vitally important; you need over 50% of the shares in order to fully control the company.
From October 2009 all companies will provide a statement of capital on incorporation. The statement of capital sets out the nominal value of the shares, the currency and the aggregate value of issued capital and sums paid. The percentage of the issued share capital owned by each shareholder determines their interest in the company. If you would prefer a controlling interest in the company you must own over 50% of the shares in issue.
What are share certificates and what details must they include?
Share certificates are receipts issued to shareholders for each share purchase made. You must include the following details on your share certificates:
- The company name
- The type of share you are issuing
- The name and address of the shareholder
- The number of shares (in words) that are to be assigned to the shareholder
- The value of the share
- A signature from a director and secretary (where appointed) of the company
What kind of accounts and records must a company maintain?
All companies are required by law to keep a full record of income, expenditure, assets, and liabilities. Keep these records must be kept safe as they will assist you in attending to your duty of returning the companies annual accounts.
Do I need to return any documents annually?
Yes, you must provide a number of documents following your 'Accounting Reference Date' (ARD). This date is usually the last day of the month your company was incorporated and occurs each year; it is the date that your financial year ends where the accounts are to be made up to. You have 10 months from your ARD to return the following documentation to Companies House:
- A profit and loss account (or income and expenditure account if the company is not trading for profit)
- A balance sheet signed by a director
- An auditors report signed by the auditor (if appropriate)
- A directors report signed by a director or the secretary of the company
- Notes to the accounts
- Group accounts (When necessary)
Where eligible, medium-sized, small, very small and dormant companies may prepare and file 'abbreviated accounts'. Small companies (with a turnover of less than £5.6 million [£250,000 for companies that are charities] and assets of less than £2.8 million) can also claim exemption from audit.
Do I have to register for VAT?
As a limited company you are legally obliged by HM Customs & Excise to pay VAT if the company's taxable annual turnover exceeds the current threshold of £70,000, or you believe that it will exceed this limit in the next 30 days. Remember, not all products and services are subject to VAT and in some cases different rates may apply.
Where can I find more information about setting up a new company?
What is the Companies Act?
Companies Acts set the legal framework in which limited companies must work. The Companies Act 2006 was introduced to modernise company law. The changes in the Act are being implemented in phases and will be complete by October 2009.
You can download a copy of the Companies Act 2006 from the Office of Public Sector Information, or from the Companies House website.