Setting up a limited company is likely to involve greater administration and higher costs than if you were a just a humble sole trader.

Essentially, the answer as to whether you should be setting up a limited company concerns personal financial liability. If you’re a sole trader and your business fails, you’re personally liable for all its debts. Potentially, you risk personal bankruptcy if the debt is considerable and you can’t pay it. Setting up a limited company can quite often offer protection against this.

Setting up a limited company

A limited company is a separate legal entity and as such, legally, it’s responsible for its own actions. The finances of private limited companies are entirely separate from those of its owner(s). Private limited companies can have one or more shareholders, but shares cannot be sold publicly (ie on the stock market). Providing you don’t trade recklessly or fraudulently, as a director of a limited company your risk of loss is restricted to money you’ve invested in the company. However, you’ll be liable for bank loans if you provide personal guarantees for that limited company.

To an extent, being a private limited company might make you more credible to potential customers, partners or investors.

To set up a private limited company you need to register with Companies House . This is known as ‘incorporation’. You need:

  • a company name – there are rules on what it can and can’t include
  • an address for the company
  • at least one director
  • at least one shareholder
  • the agreement of all initial shareholders (‘subscribers’) to create the company – known as a ‘memorandum of association’
  • details of the company’s shares and the rights attached to them – known as a ‘statement of capital’
  • written rules about how the company is run – known as ‘articles of association’
  • details of people with significant control over your company, for example anyone with more than 25% shares or voting rights
  • your standard industry classification (SIC code – this number identifies what your company does)

Once the company is registered you’ll receive a ‘Certificate of Incorporation’. This will confirm the company legally exists and shows the companies registration number and the date of its formation.

How do I set up a limited company?

To become a limited company, you register (‘incorporate’) online at Companies House. Alternatively, for a small fee, an accountant, solicitor or agent will do this for you.

What responsibilities do company directors have?

When setting up a limited company you must appoint at least one director, who can also be a shareholder in the limited company. Someone cannot assume this role if they’ve been disqualified from acting as a limited company director by a court of law or the insolvency service; if they’re an undischarged bankrupt; or are younger than 16-years-old.

Private limited companies no longer have to appoint a company secretary. Directors of private limited companies are responsible for notifying Companies House of changes in the structure and management of the company.

Accounts must be filed with Companies House each year ahead of the requested date, otherwise a fine is payable. Unless the company is exempt, accounts must also be audited annually. The company (or its accountants) must inform HM Revenue & Customs, by means of an Confirmation statement, of any taxable income or profits. Corporation Tax is then payable.

Company directors are employees of the company and must therefore pay income tax and Class 1 National Insurance contributions. Profit from limited companies is usually distributed to shareholders via a dividend payment.

Private limited companies

The majority of new companies registered in the UK are companies limited by shares. This is the most popular standard business structure when setting up a limited company, formed with the intention of generating profit for the owners of the business.

This structure is remarkably popular because it allows the sharing of profits amongst the shareholders whilst also offering restricted financial liability. The shareholders are only responsible for company debts up to the value of the shares they hold in the company. So their personal assets will be protected, should the company encounter any financial difficulties.

How we can help

We offer a selection of company formation packages all designed to make setting up a limited company as simple and straightforward as possible.

These range from our essential Digital Package – which provides the bare minimum legal requirements for official company registration – to the All Inclusive, premium package which includes a range of useful extras, such as a goodwill planning, a mail forwarding service, VAT and PAYE registration and free filing of your company’s first Confirmation Statement (previously known as the Confirmation statement). All you need do to set up a limited company is provide some basic information and a few signatures. Further information can found in our informative brochure. Download it here