Setting up a UK Limited Company
I recently wrote an email to a friend with a little (unprofessional) guidance on setting up a Limited company. Since it turned out quite large I thought it might be of use to others, so here it is:
Register a limited company
This is the first thing you need to do as you’ll need your company number & documents in order to open a bank account. Opening a bank account can take a really long time so it’s best to get started as soon as possible.
In the past I used a “formation company” - these are companies which submit your application to Companies House on your behalf. You have to pay a (small) fee for this, I think it’s £18 or something like that.
I used one called Complete Formations which was a bit clunky but fine. I don’t have any experience of any other ones.
Turns out you can do this directly with companies house, not sure why I thought you needed to use a formations company.
Choose a company name
For a limited company it’s got to end in either “Ltd” or “Limited” - for example mine is called “Green Dragon Software Ltd”. It doesn’t make any difference which of the two you choose.
Allocate share capital
You need to create some shares, define how much each share is worth and then allocate them to people to give them ownership of the company. If you’re going to 100% own the company then you can just create one single share worth £1 and allocate it to yourself - that’s what most people do! If in the future you want to give some of the company (equity) to someone else you’ll need to adjust this - but just go for 1 share @ £1 to start.
You’re probably going to appoint just yourself as managing director - that’s all you need to do.
I remember some confusion about addresses - you need to give a “registered address” for the company which is where you’re legally supposed to keep the documents for the company (bit out of date, mine are all electronic) This becomes public domain and can be viewed online for free. You should probably put your workshop for this.
I think you need to give two addresses for each director as well - I think one of these becomes public and one is kept private. I think it’s called “correspondence address” (public) and “residential address” (private). You should probably put your workshop for the correspondence address and your actual home address for the residential address.
Articles of association
There are some documents which define the purpose etc of the company. I just chose the default ones. Once you’ve registered the company you get some documents through like the company registration certificate (this has your registered company number on it, which you’ll need) and the articles of association and stuff. It seems that you really only need it for opening a bank account.
Open a bank account
For me this was the most annoying bit with both companies I opened. First time I went with NatWest and I had to make an appointment with a patronising git who interviewed me about the business I was going to set up. Because there was a person involved this took a long time.
The second time was with Santander and this was all online. They claimed they could open it in a week or something like that but it ended up being delayed - I can’t remember why. You’ll need your company registration documents.
The other benefit of Santander is that it works with FreeAgent, the bookkeeping software I use.
Do this application ASAP because you won’t be able to invoice and get paid until you’ve got your bank account set up.
Keeping money separate
Now you’ve got two legal entities (yourself and your company) you have to be very disciplined about who is spending money and who owns what. Just because you own 100% of the company doesn’t matter - you are still separate.
Unlike an individual, the rules are much stricter for companies for things like what you are allowed to buy, keeping receipts, etc. The upside, however, is that a lot of things are tax deductible that wouldn’t be for an individual, so you don’t pay any tax on those.
For example: if the company bought a mobile phone for £200 that would now be logged on the company’s balance sheet as an asset. Assuming it has a 3 year life, the value on the balance sheet would reduce by 1⁄3 each year. That reduction contributes towards your end of year profit & loss figure. That’s an important number because you pay corporation tax on the profit.
This is why you need to get an accountant & good book-keeping software! The accountant can tell you how to file things, what counts as tax deductible etc. Also I find that FreeAgent’s website often has good advice about this.
Wait for HMRC
After a few days of registering with Companies House, you’ll get a letter from HMRC telling you they know about the company, and giving you a company Unique Taxpayer Reference (UTR) number.
You need to keep this stupid number because for some reason they require you to tell them it at various points in the future (why not just use the friggin company registration number?!)
Register for PAYE
You can take money out of the company in one of two ways: payroll (AKA salary) and dividends.
Most people pay themselves a mix of both: people usually pay themselves in salary up to the first tax band (currently £10,600 this year) then pay the rest in dividends.
(Legally, dividends can’t just be paid out willy nilly - you have to take it out of the company’s current profit - so you can’t pay them if you are making a loss. HOWEVER the book-keeping software I use makes it easy to calculate your instantaneous profit & loss and see how much you’re allowed to take out)
Before you’re allowed to pay yourself through payroll, rather absurdly you need to apply to HMRC for Pay As You Earn (PAYE). Once you’ve done this you’ll then be able to pay yourself a paycheck, and pay HMRC the tax and national insurance owed for that paycheck. Again, the book-keeping software I use just does this all for me.
Register for VAT (optional)
If your annual revenue is going to be over something like £90K then you are required to register for VAT. If it’s less, you can voluntarily apply for VAT because it can be beneficial in some circumstances.
If you’re mostly selling to consumers (non VAT registered entities) you probably want to avoid registering for VAT because you’ll have to charge 20% more for the same product. If you’re mostly selling to VAT registered businesses, it won’t make any difference to them as they can claim it back, so knock yourself out.
There’s a thing called the flat-rate scheme which can work out well for companies which have low costs (for example software freelancers).
When you apply for VAT, you have to give a date on which the company will become VAT registered. You can backdate this to when you opened the company which makes life simpler, especially if you haven’t actually done any trading since then! Or you could put the date as some date in the future between big projects or something, so one client gets invoices without VAT and the next gets them with.
This is something you really need your accountant to advise you on.
Find an accountant
Because companies have stricter rules than individuals it’s really helpful to have an accountant you can ask for help. You also need to have one to do your statutory annual report.
There are lots of different packages ranging from quite basic (about £400 per year) upwards (like £1200 per year). You can choose to do lots of things yourself, using good book-keeping software, or have the accountant basically handle everything for you.
I’m really geeky and I like to know what’s going on so I’ve opted to do my own payroll and VAT reporting, and I pay at the lower end of the scale. My accountant is 100% remote (I’ve never met her) but she answers emails quickly and briefly. In other words, it’s basic but I get what I need.
Get some book-keeping software
I use software called FreeAgent which is basically the most amazing software ever. It’s not cheap - it’s about £33 per month - but I’m really in control of the business and it handles a lot of the crap with HMRC. It basically does some of what an accountant usually does, like making it really easy to do PAYE and calculate VAT and stuff.
The other really awesome thing about FreeAgent is that it automatically downloads my company bank account statements from Santander. That means it’s already done half the job of categorising things - I just need to select eg “office costs”, “travel” or whatever.
For my particular scenario, where I’m a bit of a control freak, FreeAgent is absolutely perfect and well worth the money.
If you fancy joining I think we both get a discount if you use this link: http://fre.ag/44n2b1pk
Pay for things
There are two ways of paying for things: paying directly and paying personally then reclaiming expenses. Either way you need to keep receipts and enter things into FreeAgent (or give them to the accountant I guess).
I think there are some insurance things you need, like maybe employer liability insurance and public liability insurance. To be honest I only got these because I did a contract which stated that I needed to have them. If you figure out why, please let me know!