Forming a limited company is generally a good idea if your aim is to keep your own finances and your business’ completely separate. Setting up a limited company with Companies House in the UK affords you some protection. As a sole trader business, for example, you and your business are completely linked. That means if your business falls into debt, then you could be expected to sell personal assets such as your home or car in order to cover your business debts. When you form a limited company, you actually become a separate legal entity to your business, meaning any business debts aren’t yours to deal with should things go wrong. You would be expected to sell business assets to cover your debts, of course, but your debtors couldn’t ask you to sell personal assets or use your personal finances to cover the debt.
Whilst you might be tempted to run off and register a limited company right now with Companies House, you ought to do your research to ensure that you actually want to register as a limited company and commit to that.
Today we’re also going to feature advice from an expert, Martin Dunne, who previously worked as a partner at Sayers Butterworth LLP and has a wealth of entrepreneurial and business management experience. Martin put together advice for Real Business readers back in 2009, but his words of wisdom still ring true today.
Before we explore Martine Dunne’s advice, however, let’s explore what setting up a limited company actually looks like.
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What Is A Limited Company?
A limited company is a type of business in the UK. It’s defining characteristic is limited liability – which means the individual(s) setting up a limited company aren’t liable for business debts if things go wrong.
Unlike Sole Traders who would be held responsible if things went wrong with their business, limited company owners are viewed as a separate legal entity to their business.
Essentially, as a limited company owner, you would employ yourself as a director or owner, and pay yourself a wage just as you would for any employees you have. In this way, your business and personal finances are completely separate, making it much easier to keep what’s yours and sell what’s your business’ if you need to sell assets to cover debts to save your business, or prior to closing.
Of course, if you’re starting a new venture, you won’t be concerned about your business failing – after all, you’re passionate about your new business idea. But the single most important thing you can do as a business owner is ensure you’re prepared for ALL eventualities – even your future business failing.
Let’s look at the benefits of limited companies below to help you determine if it’s right for you.
What Are The Benefits Of A Limited Company?
There are a number of key benefits to registering as a limited company, some of which we’ve already touched on and some of which are new:
- No personal liability
- Limited companies tend to garner more respect in the business world
- Tax benefits
- Easier access to funding and growth support
- Protect your business name so nobody else can take it
- Allows you to be flexible with your personal income
- Smoother investment process
There are, of course, disadvantages to limited companies, too, but Martin Dunne’s advice from 2009 covers these in greater depth later in the article.
How Do I Register A Limited Company?
You can find a full government guidance to setting up a limited company by following the link, but we’ll also cover the main steps below.
| Do Your Research | Start by making sure a limited company is right by you. The fact you’re reading our guide today is a great start, but you should also conduct further research to ensure it’s the right path for your new business. |
| Pick A Name | You’ll need to register your limited company with Companies House, but in order to do that you’ll need to name it. There are certain rules for naming limited companies and you’ll need to ensure it’s free, too. More basic names for limited companies i.e xyz Accounting – where xyz is a location – will already be taken. Get creative here but make sure you settle on a name that truly communicates your business clearly. |
| Choose Directors | Make sure you pick the right people here. You’ll likely be a director as a limited company owner, but you may have others to support. Consider appointing a company secretary too. |
| Choose Shareholders | If your company is launching with shareholders already in place, make sure this is clear. Make it obvious what owning shares in your company means and the rewards for that. |
| Get Prepared | Research what records you’ll need to keep and the documents you’ll need in place that sets out how your company will be run so directors and shareholders are aware. |
| Register | Next, simply register with Companies House. |
Should I Register As A Private Limited Company Or Public Limited Company?
That depends on whether you want your company to be open to public investment. A public limited company must allow for public investments, whereas private limited companies won’t necessarily appear on public stock markets and will often have more targeted investments from interested investors to raise capital.
Whatever way you decide, you’ll need to be a registered company of some description in order to open your business up to shareholders and investors.
What You’ll Need To Register As A Limited Company
If you’re struggling to set up a limited company yourself, you could turn to a company formation agent. Company formation agents are appointed by limited company owners to help set up their business.
Regardless of whether you or someone on your behalf is setting up your limited company for your new venture, you’ll almost certainly need the following:
- Company name
- Articles of Association – everything pertaining to how the company will be run and what that looks like
- Directors Details – Full name, date of birth, etc
- Shareholder Details
- Persons of Significant Control Details
- Company’s registered office address
You can register a company online. It’s a little more involved than if you were setting up as a sole trader, but don’t let the process put you off. You MUST inform Companies House of your company’s existence or you could face hefty fines.
Do not risk your limited company. Setting it up now will ensure you’re ready to submit your annual accounts and keep Companies House and HMRC abreast of your personal and business tax obligations – income tax, capital gains tax, corporation tax, etc.
Now, let’s explore Martin Dunne’s original advice to see how it holds up.
Martin Dunne’s 2009 Advice:
Q: “I’ve come up with a new business idea. Should I use a separate limited company for this?”
A: You mention that you already have another business and that this is run through a limited company. There are a number of advantages and disadvantages to incorporating a second limited company for the purposes of running the second business.
Disadvantages
If both businesses are profitable, your overall tax liability may be increased by running two companies.
The rate at which companies start to pay the higher rates of corporation tax is accelerated where you have a number of companies under common control, even if they are not part of a formal group structure.
Assuming that the new business doesn’t immediately make profits it may take a year for things to get off the ground as the business grows, resulting in a small loss, you won’t be able to match these losses against the profit in your existing business.
Strictly speaking you may not be able to do this even if both businesses are within one company. However, in practice, where the activities are related, this benefit can be obtained by having both activities in one company.
Running two limited companies usually means two sets of legal fees, accountancy fees, and other costs. Although these are unlikely to be huge, they all add up.
Similarly, having two separate limited companies means that you need to maintain two sets of books & records, two sets of bank accounts, and so on. This means a lot more administrative work.
Advantages
The main advantages of using separate companies are based on commercial factors. For example:
Separate companies can ring-fence potential risks or liabilities from existing business, in case it does not work out as you had hoped. This means that any problems in the new business should not damage or affect your existing business.
Where the activities of the two businesses are particularly different for example, bespoke suit making and catering it may just look too odd to have them both within one company and send a confused message to both sets of customers.
If you need investment in the new activity, you may want to keep this separate so that you are only giving away ownership of one business rather than both.
You will need to evaluate the above factors and determine what is most important overall. Part of this process will involve looking ahead a few years, to see how things might look further down the line don’t just make the decision based on current circumstances.
Martin Dunne was a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media.
Is Registering A Limited Company Right For My New Venture?
Ultimately, no matter what professional advice you receive, you’ll need to consider your particular circumstances carefully to determine whether or not a limited company is right for your new venture.
Do your research, seek advice from business experts, and consider what you want your own liability to be as a business owner, and then decide for yourself whether a sole trader or limited company business structure works best for you.
Final Thoughts
Martin Dunne’s expert advice from 2009 still rings true today, for both new business owners, and business owners who already run a limited company and are considering whether starting another one is right for you.
The key is ensuring that it meets your needs. There are a variety of business structures in the UK which can all work wonders so long as you ensure it’s right for you.
