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The steps to setting up your new limited company

In my last article, I looked into the various options available to a trader in terms of selecting his preferred trading style. In this article, I intend exploring the considerations when a decision has been made to trade as a Private Limited Company.

A Limited Company is a separate legal entity in law, distinct from its owners, the shareholders who take shareholdings in the business.

The Company will also need a minimum of one director, appointed by the shareholders, who is (are in the case of multiple directors) responsible for the day to day running of the company and are legally responsible for ensuring that the company trades lawfully and complies with all statutory requirements.

Historically a Company would also be required to have appointed a Company Secretary, assisting the directors in complying with statutory requirements, who themselves were Officers of the Company and thus able, in certain circumstances, to sign documents on behalf of the Company. Nowadays, following the latest Companies Act, there is no requirement for a Company Secretary to be appointed although you may still recognise this office holder if you wish.

So what do you need to consider initially when setting up your new Limited company?

The main points to consider are:

• The Company name;

• Who to appoint as (initial) directors;

• Who will be the initial subscribers (shareholders) in the company;

• What type of shares will you issue, and how many;

• What value is to be invested into those shares;

• The company year-end;

• The registered office of the Company;

• What Articles to adopt;

• Shareholder Agreements.

Company name

Your company is registered at Companies House and (within reason and public decency!) you can use any name you wish. However, the name selected must not be the same or similar to any other company already registered. Through the trading life of the company, you can change the company name however once formed and your name is registered you are protected from anyone else using that name.

Initial Directors

Who will be appointed as directors – this is an onerous and statutory office and needs careful consideration. Legal advice as to the responsibilities to be considered when acting as a director is strongly recommended, especially if this is the first time that you will take such an office.

In most cases, this is answered quite simply “well that’s me obviously!”

You must have at least one director but you can have any number. I would normally recommend where possible to have at least two directors as this means that if for any reason one is unable to undertake duties perhaps due to illness or holiday there is someone else available to sign and act for the company in an emergency.

Initial subscribers/shareholders

Shareholders are the legal owners of the business. When forming a company the shareholders purchase the initial shares issued by the company at face value known as par.

Normally they will be entitled to dividends from the company and are able to vote on company business in formal meetings.

It is vital you consider who the shareholders will be as not only will that decide who owns the company but it is also an important tax planning consideration.

Under the current tax regime, individuals can receive up to £5,000 of dividend income tax-free from shareholdings (although this is to reduce to £2,000 per annum from 6th April 2018) irrespective of other earnings, an important consideration, especially in a family business.

Share Types

In its simplest form, a Company can be formed with one £1 Ordinary share which holds full voting rights. Whoever owns this share owns the company and is entitled to all dividends paid and to control the voting of all matters on the company.

You can, however, issue shares with or without voting rights and you can also issue shares of different classes. Why complicate matters you may say? This is perhaps best illustrated with a simple example.

Y and Z intend forming a Limited company.

Y will take the majority interest in order to maintain control of the company by agreement but Y and Z wish to have maximum flexibility when it comes to paying dividends to themselves.

They could form a company with 100 Ordinary £1 shares carrying full voting rights. 51 shares are to be issued to Y, with 49 to Z. Y would have voting control however if a dividend of £100,000 were voted in the year then based on share holdings £51,000 would be to be paid to Y and £49,000 to Z (ignoring dividend waivers). This is because dividends are paid in proportion to the shares issued within the same class.

However another option would be instead to issue 51 £1 Ordinary A shares and 49 £1 Ordinary B shares. Each share class has the same voting rights so Y still owns 51% of the company and Z 49%.

However as they are different share classes the directors may be able to pay the £100,000 dividend in any proportion. This is a very useful tax planning consideration, but does require careful consideration of the Company Articles (see below).

Share Value

Shares can be issued with any face (par) value. Normally a value of £1 is used.

The subscribers pay the value of the par value times the number of shares subscribed for to the company.

You should consider with your advisers how much share capital to issue at formation – generally, once shares are subscribed to then this sum is invested and cannot be returned (there are circumstances where it can be, but this is outside the scope of this brief). However, injecting higher share capital value assists with credit ratings and is indicative of the level of support that the Company enjoys in terms of committed working capital.

Careful consideration, therefore, should be given when, as is typical, shareholders are making a sum of money available to “set up the Company” and whether it is required back in the short medium or even longer term.

Company Year End

When forming your company it will automatically be given a year end of the month it was formed. For instance form a company in April 2017 and its first year end will be automatically set as 30th April 2018.

As covered in previous articles this is relevant as a Limited company must file its accounts within 9 months of its year end, pay tax due 9 months and 1 day after its year end and file company tax return CT600 12 months after its year end.

You do however have the option to amend the year end of the company as soon as it is formed. There are restrictions on how short or long this period can be and you are only able to extend a company year end once every five years.

However it may be that for practical or commercial reasons it may be better to have a different year end to the normal allocated one. This should be discussed with your advisers.

Company Registered Office

The company registered office is the official address of your company where official correspondence and documents from Companies House and other parties will be sent.

This address also appears on public record at Companies House. You may wish to select your accountants or other professional advisers address which is quite normal.

Articles of Association

The Articles of the Company are in effect the rules of the company.

They seek to detail all aspects of the proper running of a Company, from detailing share types, to the responsibilities and actions of the directors to the setting of dividend policies and, perhaps most importantly, the basis upon which the shareholders are required to meet and what voting percentages are required to pass resolutions.

A company can adopt standard articles on formation or have specific articles written and adopted if applicable to circumstances or required for specific reasons. This can be a complex area and it is always recommended that this be discussed with a professional adviser as part of the setting up process.

Shareholder Agreements

Shareholders have disputes – fact – and more often than people generally anticipate when thinking about the importance of a Shareholder Agreement. This is a private document, confidential to the shareholders, not a statutory document.

A Shareholder Agreement seeks to agree the “rules” for matters that transpire in the future setting out what was agreed between the parties when everyone was of even mind. They are not expensive documents to prepare, they need not be complex but considering the need for one is certainly relevant and you should seek advice from your professional advisers.

Forming the Company

Ideally you should have considered these points, seeking professional advice where necessary, before you set up a Company. Or at the very least prior to the Company formally commencing to trade.

There are various ways you can set up a Company – visiting the Companies House website is a good starting point as this is something that can be undertaken yourself.

However you can also utilise formation agents online who will be able to form and register a company for you at a relatively low cost or sit down with a professional adviser who will be able to walk you through all the points above and complete the formation on your behalf.

Once Companies House have registered your company details, then you will receive a certificate of incorporation which will detail the Company name and unique registration number.

The process of registering a Company is generally quite quick and a Limited Company can be formed in a matter of 24-48 hours generally.

Ready to get going?

As the above article attempts to detail, ensuring you get the set up right can be vital as the Company develops and there are many people that wish they had considered everything properly at the outset before registering the Company.

It can be, and ultimately, is a simple procedure to create and register a Company, but the options available to you potentially make short-term savings secured by you by doing everything yourself lead to missed opportunities later so it is always best to sit down and discuss with a qualified professional to make sure you are fully aware of your options and that you make the right choices for you and your circumstances.

In my next article, I will be looking at what requirements new business face regarding record keeping and a review of the type of expenses that can and can’t be claimed depending on trading style.