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Creating a New Company

NIC Document

Summary

This guide provides information on the types of business that can be created (with the main focus on forming private limited companies), what is required to set up a new private company and what you need to do to ensure that your company continues operating.

In brief

  1. Business types
  2. Requirements to incorporate a private limited company
  3. Ongoing compliance

Introduction

The first stage of creating a new company is to decide what type of structure is appropriate for your business proposition. You can select from the several structures that are available within UK law, each appropriate for different types of business. Companies House is responsible for checking all private company formation documents, as well as all the documents required for ongoing compliance. To form a new company, you have to comply with a number of legal requirements. Once you have formed your company, you will need to meet a number of continuing obligations, both to Companies House, and in the case of your operating company, to other government groups.

Business types

Sole trader

Becoming a sole trader is the simplest way to start a business. The only essential requirements are to register yourself as self-employed with HM Revenue & Customs (HMRC) and declare your earnings each year for tax purposes. The main drawback to sole trader status is that you are personally responsible for any liabilities. This means it is important to have the appropriate business insurance cover (and other insurance cover if required) to protect yourself against legal action.

Partnership

A partnership is very similar to a sole trader, in that it links two or more self-employed individuals in a simple business structure, with no legal status. The partnership itself will need to submit an annual self-assessment form to HMRC and pay income tax on all profits as well as National Insurance contributions. The individuals in the partnership will also need to submit an annual self assessment.

Limited liability partnership (LLP)

An LLP is very similar to a partnership, except that the individual members will have a lower liability to any debts that arise from running the business. The individual partners are not responsible for the outside liabilities incurred by members of the partnership. You can form an LLP by applying to Companies House and paying around £20.

Private limited company

In a private limited company, the company’s finances are distinct from the personal finances of the owners. This means that the owners will only have a limited liability for the debts of the company. However, the directors of the company may be liable for the debts if they are proved to be negligent in the running of the company. A private limited company must have at least one director, and is formed by application to Companies House. The ongoing requirements for a private limited company are more demanding than for a sole trader, but the company liabilities are separated from personal liabilities.

Public limited company (plc)

A plc is a limited company which is permitted to sell its shares to the public. A plc does not need to be a member of a financial market, although it must have issued shares of a minimum of £50,000 (or €65,600), of which at least 25% have been fully paid up. The company must also have at least two directors, of which one is a qualified company secretary, as well as a minimum of two shareholders. The advantages of a plc are that it has access to capital markets and can offer its shares for sale to the public through a recognised stock exchange.

Requirements to incorporate a private limited company

Legal documentation

A professional advisor can form a company on your behalf for a small fee, as well as providing the Memorandum and Articles of Association. Four sets of documents are required by Companies House to incorporate a new company. These are:
  • Memorandum of Association – the document that defines the relationship between the company and the outside world, it includes information such as the type of company, the objectives of the company (type of business) and its authorised share capital
  • Articles of Association – the regulations governing the relationships between the shareholders and directors of the company
  • Form 10 – gives details of the directors, the secretary and the intended address of the registered office
  • Form 12 – a statutory declaration of compliance with all the legal requirements relating to the incorporation of a company, i.e. showing that the company complies with the conditions of the Companies Act 1985 and the Companies Act 2006
  • Directors

    Private limited companies now only need one director who, due to changes implemented by the Companies Act 2006, can now also be the company secretary. Although a company board can comprise only one member, most companies would expect to have more. Board members may comprise executive managers of the company as well as external (non-executive) members who provide certain skills or experience. Non-executive board members may be elected due to their financial contacts, financial experience, industry contacts, or expertise in the technology area of the company. Not everyone can be a company director and the following restrictions apply:

  • They must not have been disqualified from acting as a company director (unless the court has given them permission to act for a particular company)
  • They must not be an undischarged bankrupt (unless they have been given permission by the court to act for a particular company)
  • They must not be under the age of 16; and
  • At least one director must be a natural person, i.e. an individual. A natural person is defined as an individual human being, i.e. not a company
  • Shares

    To define the ownership of a company, the founding members are normally granted shares, with the amount depending on their initial contribution to the company. At this point it is likely that the shares will be common, or ordinary, shares. If the company is seeking investment, it is likely that the share structure will become more complicated. An investor will wish to protect his investment, as well as have a say in the running of the company. This means an investor will probably wish to buy two different types of share when they invest. The first type will be ordinary shares, so that they will have voting rights. The second type will be preference shares. Preference shares do not have voting rights, but in the case of the winding up of the company, they are higher up in the queue for the division of any assets. Many investors now wish to have convertible preference shares. These shares act as preference shares, and the investors also have the option to convert them to ordinary shares, which they can choose to do at any point. The investor may then choose to convert these shares once they are convinced that the company will be successful.

    Ongoing compliance

    Board

    An operating company should have a minimum of one board meeting a year, as a board meeting is required to authorise the annual accounts, a requirement for Companies House. The company secretary is normally responsible for arranging board meetings, general meetings, and ensuring there is a proper record of each meeting. The secretary must arrange a board meeting if any director asks for one, or if 10% of the members request one – 5% if it has been more than 12 months since the last meeting.

    Accounts and annual return

    The accounting period starts from the date of incorporation of the company. The company must provide a copy of the annual accounts and the annual return to Companies House. A private company must file its annual accounts within 10 months of the end of its accounting period, or it will be fined. The requirements for the accounting format are available on the Companies House website.

    HM Revenue & Customs (HMRC)

    If you plan to employ staff, you must pay National Insurance and Income Tax on their salaries. Your company will be responsible for calculating and collecting tax and National Insurance Contributions from staff. This must then be paid to HMRC, which can charge severe penalties if you fail to meet its requirements. Outsourcing payroll services is generally a cost-effective way of ensuring that payments to staff and HMRC are correct, unless your company is large enough to have a dedicated accounts department. Your company will also have to complete an annual Corporation Tax return and pay any due taxes within nine months of the end of the company accounting year. Corporation Tax is a tax on the company's taxable income or profits.