Whether to form a Company, and how to go about it, are questions which can be time-consuming and confusing.
This guide will help you understand what a Company is all about: The Benefits, Obligations, and How To Set It Up. The guide is user-friendly yet comprehensive and covers everything you should know about forming a Company - including the pitfalls, which our service will ensure you avoid.
There is just one highly significant difference between a Company and a Sole Trader business (or a Partnership). This concerns the role of the owner - and all other differences are a consequence of this role.
As a Sole Trader or Partnership you and the business are one - in one common 'pot'. You own the goods you supply, your customers owe money to you. You personally make a profit, you are taxed personally upon it. You are liable for business debts and any losses are yours - in a Partnership you're liable for your Partner's debts and actions as well. The relationships between your business and your customers, your creditors, HM Revenue & Customs and so on, are all in fact with you personally.
A Limited Company is completely different. A Company is a totally separate Corporate Body. The Company provides goods and services and is owed directly for these. It takes on debts and owns or leases property. If it makes a profit, the Company pays Corporation Tax. All these transactions are distinct from you - even though your day-to-day practical activities may be almost precisely the same as when you are - or were - a Sole Proprietor. In fact, you're right out of the 'pot'.
When you form a Company, you become its owner. It is an asset - like property - which you can dispose of as you wish. As a Director, you become an employee of your Company, creating its success and value, and taking a salary and profit after tax. But, now, you are not responsible for its losses if things do go wrong.
This protection from loss - Limited Liability - is the most significant advantage of trading as a Company. But it brings obligations; responsibilities to the public which you are legally obliged to fulfil - and with penalties if you don't!
If business fails, limited liability can protect the owner of a Company from personal loss, or even bankruptcy, which a sole trader could not avoid. Unless you have given any personal guarantee for a particular transaction - or acted illegally - the debts are the Company's, not yours.
This advantage increases with the growth in commitments the business makes in order to operate and develop.
Commitments and liabilities for raw materials, wages, premises or leases, often made before payments are received, are better covered under limited liability.
A Unique Trading Name
When a Company name is registered it has to be unique. For as long as the Company exists, the name can never be copied by another Company. In contrast, Sole Trader names have no Statutory protection and can be copied, although the private National Business Register now provides considerable protection.
Prestige and Status
There is something about owning a 'Company' which owning a 'business' just doesn't quite have. A company is seen as having greater prestige and status. This may be partly an image, but it does affect the behaviour of clients, customers, suppliers - and employees.
Ownership and Continuity
The Ownership of a Company is known precisely, so it is easier to value, buy and sell. The owners are listed along with the proportion of the Company (or Shareholding) that they own. The relationships between joint owners are consequently far less complex than most Partnership Agreements.
A Company share can be sold or, for example, given away in a will. But if a sole trader dies, so does the business.
Setting Up Costs
Forming a Company is not expensive, usually a small sum compared with the total investment required to establish a new business.
Companies only need to have their accounts audited by a Chartered or Certified Accountant if they have a turnover of more than £1 million and have gross assets of more than £1.4 million. Below those levels companies need only to file limited information called "Modified Accounts".
A company below these thresholds can request an audit, but it is not required. When the information is filed with Companies House suppliers/customers can check up on the financial standing of a company and, because published information is available, many suppliers prefer to deal with a limited company rather than a sole trader who files no public information.
Assets and Income
As a Sole Trader owns the business assets personally, cash 'drawings' can be made as required. In contrast, Company assets belong to the Company and must be used for Company business. 'Drawings' are now taken as a 'Salary' - plus Dividends, after tax.
Taxation and National InsuranceCompany Directors are normally employees of the Company paying Tax through PAYE. Although they have fewer personal tax-deductible expenses than Sole Traders (or self employed) under Schedule D Tax, Directors benefit in other ways.
There are many technical differences between Companies and Sole Traders with regard to tax and National Insurance, so talk to your accountant before deciding which is most advantageous for you.
There are several types of Company: Public Limited Companies (PLC's), Companies Limited by Guarantee, Off-Shore Companies and others. 121 Company Advice can advise you on all of these, but what follows concerns the most usual form - the Private Limited Company.
The creation and running of a Company is governed by various Companies Acts and for formation every Company must have:
1. A Unique NameThe Company name must not be identical to any other.
2. The Right People
Owners: 'Members' or 'Shareholders'
A company has to be owned. It need have only one owner but there are normally at least two. Owners are technically Members. All Members have some Share in the business as Shareholders and they must be listed in a Register of Shareholders.
Managers: 'Officers' or 'Directors'
Owners must appoint Officers to manage the business. These are the Directors. In most Companies, Directors are also the Shareholders. A Company must have at least one Director and a Company Secretary may be appointed if you wish. If there are two or more Directors, one of them can also be Company Secretary.
A 'Company Secretary'
A Company Secretary may be appointed by Shareholders as the Officer of the Company specifically responsible for maintaining all statutory information about the Company.
3. A Specific Location -The Registered OfficeThis is the legal address of the business (not necessarily its trading address) at which Companies House, HM Revenue & Customs, customers, suppliers and the public can serve documents and assume that they have been received by the Company Directors. Details of Shareholders and Officers must also be available for public scrutiny at this address.
4. Clear Objectives -the Memorandum and Articles of AssociationThe nature of the business the Company will carry out, along with other details, must be clearly defined in a document called the Memorandum and Articles of Association.
When you have decided to form a Company and you know who the Owners, Directors and Company Secretary will be, formation is relatively straightforward. Now though, there are many details to sort out. Most people find that specialist advice is necessary to ensure that Registration is achieved quickly and efficiently.
The following information is needed to Register your new company:
The Company Name
Names of the First Shareholders
Names of the First Directors
Name of the Company Secretary
The Registered Office Address
Memorandum and Articles of Association
These details can be conveniently completed using the 121 Company Advice application form.
The Unique Name
The Company Name can be almost any name you want, although there are some specific limitations laid down in Company Law.
A Company name must not:
i) Be the same as another on the Register. Check this by carrying out a Name Search through 121 Company Advice.
ii) Contain the words Limited, Unlimited, or Public Limited Company except at the end of a Name.
iii) Be offensive.
iv) Constitute a criminal offence.
v) Give the impression that the business is connected with the Government or a Local Authority.
There are certain 'Words and Expressions' for which special permission must be obtained from the Secretary of State or from other Institutions. Words like International, Royal, Architect and so on. The idea is to stop Companies implying that they are bigger than they actually are or supply services that they don't - check with 121 Company Advice on your choice of name.
Beware of creating a Name which is Similar To or Too Like another Company Name. An existing Company has twelve months in which to complain to the Secretary of State that a new name is 'too like' theirs. Many new Companies have had to change their Name at this point - a potentially expensive experience. Names can be considered 'too like' if they are phonetically identical, use similar spelling, have a similar Distinctive element, or are similar in other ways. Companies House will not check for 'Similar' names, only 'Identical' names.
If you trade under a name other than the Registered name, you must comply with the Business Names Act 1985 by disclosing the Company details (Company Name, Number and Registered Office address) at each of the premises occupied and on all letterheads, invoices, receipts and orders.
The People - Members, Directors and Company Secretary
The Members, Directors and Company Secretary will have been decided upon amongst yourselves and can be added to forms where necessary.
What to watch out for
Anyone over the age of 16 can be a Director, unless they are an undischarged bankrupt or subject to a disqualification order. So check out your potential Members if you are not familiar with their background.
The Company Secretary's duties include completion of various annual reports . An agent, accountant or solicitor can take on this role for an annual fee. Failure to provide certain information on time, however, is an offence - for example, late filing of Annual Accounts will definitely result in a fixed fine.
A Specific Location - The Registered Office
The Company must be registered in the region in which you have decided to locate the Registered Office (England & Wales, Scotland or Northern Ireland).
The Registered Office need not be your trading address and Companies often use the address of an accountant, solicitor or 121 Company Advice for an annual fee as their Registered Office address.
What to watch out for
Make sure that you check the annual fee for a 'hired' address and especially that the requirements for public access to information are met
Memorandum and Articles of Association
The Memorandum and Articles set out the Objects, aims and rules for the Company.
What to watch out for
We form companies with a standard objects clause which permits a company to do anything. This is perfectly acceptable to banks and is a legal document. If you form a company with very specific objects then you will be limited to only doing those activities.
You must decide on the amount of Shareholding.
The issue of shares amongst the shareholders represents the division of ownership of the Company. For example, to ensure control, one shareholder would need to own 51% of the Shares actually issued. The shares you issue are valued at £1 each. If you have just one shareholder, it is common to issue just one share. This gives the sole shareholder 100% of ownership, with the lowest level of liability (the £1 share). For two shareholders who want to be equal partners (50:50), it is common to issue one share to each shareholder.
What to watch out for
Although control is achieved with 51% of ownership, minority holders still have some legal rights. Check with your accountant or 121 Company Advice before finalising arrangements with co-owners.
The Statutory Declaration
A Statement of Compliance , which confirms that all the information supplied for forming your Company is correct, is automatically completed by 121 Company Advice on your behalf.
Once this information is supplied on our forms, and assuming that the proposed name appears to be acceptable, We will Register the Company, obtaining a Registration Number, adding it to the Company Register and providing you with a Certificate of Incorporation. This, or a copy, must be displayed at the Registered Office, and a copy will be required by your Bank.
Once your Company is registered, you must immediately meet a number of further requirements.
You must display a Company Nameplate at the Registered Office address.
The Company must obtain Statutory Books in which to keep the Register of Shareholders, and later the Minutes of Annual and General Meetings etc. 121 Company Advice supply your statutory books by electronic means.
HM Revenue & Customs will contact you to register for PAYE purposes. Remember that Directors are employees, so you must register even if you do not employ anyone else initially.
You must register your Company for VAT, unless the turnover will be below the minimum rate.
Now you can print your business stationery. The Company Name, Registered Number and Registered Office Address must be shown on all stationery, plus your VAT Registration Number on Invoices and Statements, etc. If you are trading under a different name, more details are needed to comply with the Business Names Act. Make sure all these details are correct as Directors can lose their limited liability rights if they are incorrect.
The Company Secretary or your accountant can inform Companies House of the Accounting Date, that is, the end of the Company's first Financial Year.
We will issue Share Certificates and detail these in the Shareholders Register, which we complete for you.
Now that your Company is fully established, there are a number of statutory requirements which must be met on an on-going or annual basis. The Company Secretary is responsible for seeing these are done.
1. Change of Company Details
Companies House must be notified of any changes to Company ownership, Officers or Registered Office address.
The register of Shareholders and Register of Directors must be kept up to date at the Registered Office, and Share Certificates issued as appropriate.
3. Company Meetings
Minutes of Annual and General Meetings must be kept in the Statutory Books.
4. Accounts - Book-Keeping
Books must be kept up-to-date which reflect the current financial position of the Company. Check your systems with your accountant early on.
5. Annual Accounts
Annual Accounts must be prepared for Companies House and the HM Revenue and Customs. These must be signed by a Director and the Company's Auditor. Companies House must have a copy of a Private Limited Company accounts within 9 months of the end of the Financial Year or late filing penalties apply. Audits are only required for companies above a certain threshold.
6. Annual Return
Distinct from Annual Accounts, the Annual Return confirms current details of the Company. Companies House now allows you to file this online for speed.
Most Companies are formed or purchased through a Company formation agent, such as 121 Company Advice, an accountant or a solicitor, who will cover all the necessary specialist details.
The advantage of professionals is that they can advise on Company names, they have proper systems to carry out Company searches, ensure forms are completed correctly, provide Objects, Memorandum and Articles, Nameplates, Statutory Declarations and so on. However, the range of services varies considerably. Be cautious about saving a few pounds on the basic cost - you may have to change things later, and that can prove expensive.
We provide Tailor-made Companies.
Tailor-made Companies are produced entirely to the client's requirements, but only take one day to Register. The advantage is having the Name you want and your details on the Register from the start.
Tailor-made Companies are formed with your details.
Certificate of Incorporation
Memorandum and Articles of Association with Fully completed statutory books and Company Register
- Annual Accounting Date notification
- Completed share certificates
- Advice regarding the first meeting of Directors
This is all sent to you as an e-mail package.
121 Company Advice offers the most comprehensive service available. Whatever your needs, we can supply a Tailor-made Company and further services to suit you.
Company formation includes a free Company Name Search, completion of all Registration requirements and provision of a Company Kit - with all you need to start trading with your new Company.
Registered Office Address Facilities
121 Company Advice can provide a Registered Office facility in Birmingham and if needed, a Company Secretary.
Company Secretary Service
The role of a Company Secretary is a vital one, but the responsibilities can seem daunting. 121 Company Advice can supply an efficient, professional Company Secretary service and advise Companies House of any change of Company particulars.
We can also organise VAT Registration for you.
Our service to new Companies extends to the final details such as provision of your Nameplate. You may select from a wide range of plates.
Trade Mark Search and Registration
121 Company Advice can also arrange to register your trading name, or any product name, as a Trade Mark on your behalf, and we strongly recommend Trade Mark searches.
Domain Name and Website Services
121 Company Advice can also provide full domain name and website services to get your new business trading on the internet straightaway. You can register the best available domain name for your company and our IT team will create and maintain a fully functioning professional website for you.
121 Company Advice also forms Offshore and International Companies for worldwide tax efficiency and trading. Ask for our International brochure.
An Offshore Company Network can be cost-effective at surprisingly low levels of turnover.
121 Company Advice Limited
3 The Square