Creating a business is extremely hard work, but to set up a limited company, it’s much simpler than you might think. Registering a company can be done on-line through a formation company. They put together everything you need and check to see if your proposed company name can be accepted. Alternatively, if you have an accountant for the business, or plan to get one, your accountant should be able to put forward the necessary data.
Difference between a sole trader and a limited company
So, what exactly is the difference between a limited company and a sole proprietorship? In laymen’s terms, a limited company is deemed its own legal entity. It is able to own property, assets, sue and incur debts. Essentially its finances are completely separate from the personal finances of the directors and shareholders, and therefore generally the owners cannot be held responsible for company debts. This is the polar opposite to sole traders or business partnerships, as if those businesses have financial troubles, then owners can be held accountable for their debts.
What you need to get started
What you need to kick things off very much depends on what sort of business is it. Some organisations will need large offices stacked full of equipment with staff raring to go, whereas some business will be able to operate out of a home office. There are, however, a few steps that must be taken when an owner actually decides to set up a limited company. There are the basics, such as deciding on a company name, registering the business, deciding on an official address, finalising company directors and then finally registering with Companies’ House.
The name cannot be the same as another registered company, or even one with a name that is too similar. There are tools such as the Intellectual Property Office which can be used to check which company names are registered. There are also certain regulations on which words can be used within a company name. A name cannot contain potentially misleading words which imply personal qualifications, unless they are genuine, such as Chartered or Royal.
A limited company needs to have at least one company director, this is often the person owning the company. Although a residential address can be used to register a company, only assets which are also registered to the company will be classed as being owned by the company.
What Documents do you need?
When you set up a limited company there are certain documents which need to be signed, whether you use a company formation agent, accountant or do it all yourself.
- Memorandum of Association – This is a legal statement, which is signed by all parties who are forming the company and must include the names and addresses of all directors.
- Articles of Association – This document states the powers and rights of company directors and shareholders.
Shares can be split amongst any number of shareholders, proportionate to the amount invested. Usually a business will issue ordinary shares, however, there are multiple different types of shares which could be available.
An accountant and a bank account
Although an additional expense, choosing an accountant to work with you, when you set up a limited company can be hugely beneficial. An accountant can help with a formation package, which tends to consist of setting up the VAT registration, bank account and corporation tax registration.
Normally the accountant will also take care of payroll and taxes. An accountant can make sure that everything is set up correctly and that there are no gaps for errors. As well as taking care of these financial matters an accountant can also offer helpful advice as a company grows.
Setting up a business bank account is much easier than you might think. It is a simple case of setting up a new account with your bank, or a new bank. However, an accountant can help advise you on where you might be able to find the best deal.
As part of planning your new business, it is useful to put together a cash flow forecast, so that you can predict what money flows in and out of the business during a given period. A cash flow forecast will also give you an indication of how much cash you will need to get things up and running and importantly, you can see where that money is going to be spent. Businesses will always need cash to set up. Depending on the nature of the business, setting up some organisations can be much more expensive than others. There are several different means of getting funding right for a business, but it all depends on the options available.
If the directors have enough available themselves, they may decide to be self-sufficient and fund the business out of their own pockets. For other businesses, which need more equipment, larger office space or extra staff, then they may need to consider forms of commercial finance, or loans. A finance broker could be very helpful here, using all their expertise and knowledge to help the business secure the best finance packages available out there. In terms of actually forming a business into a limited company, the cost can be minimal, as it is a case of correctly registering the company.