What is a limited company?

What is a limited company and how do I set one up?

If you want to set up a business but don’t know whether a limited company is right for you, here’s a quick guide to help you get started.

What is a limited company?

A limited company is a profitable business. It is registered at Companies House. It is it’s own entity, separate from its owners and with separate finances. The owners are only liable for debts up to their own investment value in the company. A limited company has shares and shareholders, makes a profit, and profits stay in the business after tax.

If you don’t make a profit but have a limited company, then it would be ‘limited by guarantee’. It’s still separate from the owners and has separate finances, but also has guarantors and the profits are invested back into the company.

How to set up a limited company

So you’ve decided that a limited company is right for your business, but how do you set one up?

Pick your company name

There are several rules around choosing a name for your company, for example the name has to be unique and can’t be offensive. You can check whether the name you want is available at Companies House.

Appoint a director

To be a limited company, you’ll need to choose a director. You can also appoint a company secretary but this isn’t mandatory. A director has strict responsibilities, and is legally responsible if they don’t meet them. These responsibilities include following company rules, keeping records and reporting changes, submitting accounts and tax returns, and paying Corporation Tax. The director can also be a shareholder or guarantor.

Decide on shareholders

You’ll need to choose shareholders (or guarantors) for your company, and identify people who have significant control over the company with voting rights of over 25%.

Most limited companies are owned by shareholders, and must have at least one shareholder. If there’s just one shareholder, they will own 100% of the company. To issue shares, you will need to:

  • Give information about the shares, including the share capital of the company (number of shares and their value), and names and addresses of shareholders
  • Define the rights each shareholder will have (share of dividends, if they can exchange their shares for cash, if they have a vote within the company)

Create a memorandum and articles of association

A memorandum of association is created automatically if you register your company online. This is a legally binding statement signed by all shareholders agreeing to create the company.

Articles of association are rules about how the company will be run, which is agreed by shareholders and the directors. You will need to write these yourself.

Register your company

Now you’re ready to register your company! You can do this at Companies House, and you will need to register the official address of your business and choose a SIC code (which explains what your company does). You can register for corporation tax at the same time.

Which accounting records will you need to keep?

It’s really important to keep accurate records about the company and the accounting. Company records include shareholder votes, company promises to repay loans (debentures) or compensation payments (indemnities), mortgages or loans, and who buys shares in the company. You also need to keep a register of who has significant control in the company (a PSC register).

Extensive accounting records are needed when you’re running a limited company. These will include:

  • Income and money spent
  • Company debts
  • Stock owned each financial year
  • Company assets
  • Goods bought and sold

To file your annual tax return you will need records of all money spent and received by the company. This will include receipts and invoices. You will need to keep these records for at least 6 years.

Using an online accounting solution like Bokio makes running a limited company easy, as you can keep all the bookkeeping and invoicing records you’ll need to file your annual tax return online. You can upload receipts and other documents to record your transactions, and create and send invoices to your clients, so there’s no need to keep paper copies. Bokio is Making Tax Digital compliant, so you can send your tax return quickly and easily, in accordance with HMRC.

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