Many individuals opt to set up private limited companies, as structuring your business in this way allows your company's finances to be separated from your personal finances. Corporation tax must be paid out of any profits and the remaining profits available for distribution can then be paid as a dividend to shareholders. You can find out the current corporation tax rates here. Directors run limited companies and owe legal duties, primarily to the company and its shareholders. For further information, read Private limited companies.
Setting up a private limited company can suit all sizes of business and provides various advantages over operating as a sole trader or partnership. One of the main advantages is the fact that liability is only limited to what you invest in the company. However, this advantage also generates more paperwork and official documentation, which is published at Companies House.
If you choose to set up a private limited company, registration with Companies House is essential and this includes choosing a name that hasn't already been taken.
What is a private limited company?
How to set up a private limited company
Firstly you'll need to choose a company name. This is different to a business name, and you will need to find a name that has not already been registered. This can then be used to register your business with Companies House, which is a requirement for all limited companies.
Running a private limited company
Running a limited company entails ongoing reporting and filing responsibilities in each financial year. Even if the company does not trade, a confirmation statement must be filed at Companies House. If you are late in filing, you can be prosecuted or the company could be closed down. The confirmation statement should include details of:
- the company's directors
- the company secretary (if one is appointed)
- the registered office
- the company's principal business activities
- the issued share capital and shareholders
- where the company's records are kept
For further information, read Annual accounts and tax return and Filing your confirmation statement.
If your company is trading, statutory accounts should also be submitted and these include:
- a profit and loss account
- a balance sheet signed by a director on behalf of the board
- notes to the accounts
- a directors' report signed by a secretary or director
- an auditor's report signed by the auditors (unless the company is exempt from audit)
The company must register for VAT if it expects turnover to be more than the current threshold and directors must submit a self-assessment tax return each year and pay tax and National Insurance through the PAYE system if the company pays them a salary. You can view the current VAT thresholds on the Government website.
Company directors
Company directors are legally responsible for managing and running the day-to-day business of the company and can be personally liable for a company's actions. Normally company directors have been formally appointed by a set legal process and are listed on the UK Companies Register. The process will be contained in the company's articles of association for appointing and removing directors. For further information, read Appointing and removing directors.
Directors of a company have legal fiduciary obligations and duties to the company and the shareholders. Some of the common duties include acting in the best interests of the company, acting within the powers given to them by the articles of association and declaring any conflicts of interest or personal interest in proposed transactions. Failure to fulfil these obligations can result in disqualifications as a director, financial penalties and even criminal sanctions for wrongful or fraudulent trading. For further information, read Directors' duties.
You may also wish to appoint a non-executive director with a Letter of appointment. Non-executive directors carry the same duties and obligations as regular directors. However, the distinction between executive and non-executive directors is that non-executive directors usually don't deal with the day-to-day operation of the company. Instead, they contribute by providing expertise and help scrutinise the performance of the business and give strategic advice and support to the executive directors. Non-executive directors can be a very useful addition to start-up boards by providing valuable, independent advice.
Documents a private limited company might need
Board minutes
Keeping board minutes can help to ensure the directors consider their duties when making decisions and are a legal requirement in their own right. All private limited companies are legally required to keep minutes of board meetings. It can help to use a professionally prepared Board minutes template. A board minutes template can be used to record a selection of routine decisions agreed by the board, such as appointing directors, appointing the company secretary, approving the statutory accounts and approving draft documents. Maintaining accurate board minutes also means that the directors' consideration of their legal duties can be properly recorded and kept as evidence. For further information, read Board meeting minutes.
Shareholders' agreement
Putting in place a Shareholders' agreement at the start can avoid potential future conflict. The shareholders are not involved in the day-to-day running of the company, but their approval is required for certain matters. Putting in place a Shareholders' agreement formalises the rights and obligations of the shareholders. It can record such things as the procedure at board and shareholder meetings, what type of decisions must have unanimous shareholder approval and the procedure for transferring shares. The agreement may also include provisions on how to resolve disputes (eg referring to an arbitrator) and a buy-out procedure or when a compulsory transfer of shares is required. It can be used between some or all of your company's shareholders as an effective way of ensuring stability and continuity and also covers important issues such as company administration. For further information, read Shareholders' agreements.
Share certificate
When you issue or transfer shares in a company you may need to issue a Share certificate in order to formalise the transfer of ownership. Companies need to issue a share certificate within two months of its formation or the date of the new share transfer or issue. For further information, read Share transfers and issuing new shares.
Loan agreement
If your company intends to lend or borrow money for funding purposes, it's vital that you have a professionally written Loan agreement in place to protect your business interests. A loan agreement contains everything needed to protect both parties and comply with the law in the process. It covers repayment details, warranties given by the borrower, obligations and restrictions on the borrower, as well as how to end the loan agreement. For further information, read Loans between companies.
Employment contracts
When you appoint directors to a company, it may be necessary to draft a Senior employment contract. This document sets out the duties and role the director has to the company, remuneration and expenses, confidentiality provisions and post-employment restrictions. As directors are usually exposed to more confidential information, it's important to set out these provisions in the senior employment contract. Less senior employees can be given a normal Contract of employment. For further information on post-employment restrictions, read Post-employment restrictions.
Closing a limited company
There are many reasons why a company needs to be closed down. It may be that the directors or shareholders no longer want to invest their time and money into the company, or the company has become insolvent and incurred too much liability. The cheapest and quickest way of closing a limited company is through getting it struck off at Companies House. This process is usually easiest if the company is solvent. If the company is insolvent, an entire process has to be followed. This can involve appointing a liquidator, passing a shareholders' resolution and sending this to Companies House. The insolvency process is different in Scotland. For further information, read Insolvency in Scotland and Closing a limited company.