Introduction

Ready to launch your business? That's exciting news! First big decision, what format for my business? Your choice of business entity should align with your activities and will influence how you pay taxes and secure funding. Therefore, it's crucial to determine which structure fits your operations.

In the UK, there are three main business structures to consider: Sole Trader, UK Limited Company, and Partnership. Let’s focus on Limited Company here.

What is a private limited company?

The initial step is to ensure that a limited company is the most suitable format for your business.
As per the UK Government, a limited company is a company ‘limited by shares’ or ‘limited by guarantee’.

Limited by shares

Limited by shares companies are usually businesses that make a profit. This means the company:

• is legally separate from the people who run it
• has separate finances from your personal ones
• has shares and shareholders
• can keep any profits it makes after paying tax

Limited by guarantee

Limited by guarantee companies are usually ‘not for profit’. This means the company:

• is legally separate from the people who run it
• has separate finances from your personal ones
• has guarantors and a ‘guaranteed amount’
• invests profits it makes back into the company

What are the benefits of setting up a UK limited company?

While it can be more work to set-up than a sole trader, a limited company often offer great benefits for an online business. Let’s deep dive on some of them:

Accessible to non-UK resident

Non-residents can form a company in the UK, the application process and legal requirements are the same for everybody. You would still need to have a UK registered business address, open a business bank account, pay Corporation tax as a limited company, register for VAT if you reach the £85,000 yearly turnover as well as pay income tax and possibly national insurance. 

Reduced risk of personal liability

As a sole trader, all business debts and liabilities are your personal responsibility. However, in a private limited company, your liability, as well as that of any other shareholders, is limited to the value of your shares. This arrangement reduces the risk of personal assets being seized to cover business debts in case of failure.

Higher business profile for customer and investor

A private limited company often has a better reputation than a sole trader. Its substance can reassure clients, especially in e-commerce where a physical presence is not visible. It also provides confidence to investors, making it potentially easier to attract funding.

Easier access to growth funds

As just mentioned, private limited companies can access a wider range of funds for growth. This includes bank loans, venture capital, and crowdfunding. This is because investors often perceive limited companies to be less risky.

As a private limited company, you can even raise funds by selling shares in your business while benefiting from tax advantages for your investors via the Seed Enterprise Investment Scheme (SEIS).

Lower taxation

Sole traders are subject to income tax and National Insurance on their business profits. These are determined yearly through a self-assessment tax return, with rates and allowances matching those for private individuals.
In contrast, a limited company is taxed via Corporation Tax, which is computed based on the company's income after deducting allowable business expenses.

Corporation Tax rates for smaller businesses are lower than corresponding income tax rates, and these companies can claim a broader range of allowable expenses.

Rates for Corporation Tax years starting 1 April 2024

Rate	2024
Small profits rate (companies with profits under £50,000)	19%
Main rate (companies with profits over £250,000)	25%

It's interesting to note that although you'll also pay personal income tax and National Insurance contributions as a director or owner of a limited company, you have greater flexibility in how you pay yourself, which can lead to savings on your personal tax bill.

Protected business name

Registering your business name with Companies House protects it from being used by other businesses. If Companies House identifies a matching or very similar name, they will notify your business and deny permission. This protection prevents other companies from falsely presenting their products as genuine copies of your offerings.

Personal income flexibility

As an owner or director of a private limited company, you can compensate yourself with a mix of salary and dividends. Dividends are taxed at a lower rate, so this method can reduce your tax liability and be more tax-efficient than a salary alone.

There are also other methods for directors to take out money from the business, such as bonuses, pension contributions, directors' loans, and private investments. Each of these options offers varying levels of tax efficiency.

Sole traders, on the other hand, lack this flexibility. They derive income from the business's profits, which are taxed at the standard personal income tax rates.

Company pension provision

Within a limited company, you could potentially benefit from a company pension scheme and also invest in a personal pension scheme. On the other hand, sole traders must make their own arrangements by joining a personal pension scheme and making regular contributions.

How to set up a limited company: step by step guide?

Once you have confirmed that a private limited company is right for you, you can start registering your company.
Setting up a limited company can be straightforward using the Companies House Registration Portal. To ensure a smooth and error-free process, we recommend following this step-by-step guide. Once you have the answers to all the necessary questions, you can easily establish your company online.

1. You need to choose a name

First, you need to choose a name, following specific rules.

2. You need to choose director and a company secretary

Your company requires at least one director and may also have a company secretary to assume some of the director's responsibilities, although this is not mandatory.

You can appoint yourself for the sake of simplicity.

It's crucial to understand your responsibilities as a director. While you can hire assistance to perform these tasks, you remain solely responsible if they are not completed or performed inadequately.
Here are your responsibilities as a director of a limited company:

• Follow the company’s rules from the article of association
• Maintain company records and report any changes
• Submit your accounts and your Company Tax Return
• Inform other shareholders if you stand to personally benefit from a transaction made by the company
• Pay Corporation Tax

Directors are not required to reside in the UK, but they must have a UK registered office address. As a director, your name and service address will be listed on the Companies House public register. If you do not want your home address to be publicly available, you can submit an application to Companies House to have it removed.

3. You need to define your shareholders and your shareholder structure

First, you need to issue initial shares. This process involves providing information about the number and total value of each type of share the company has.

You also need at least one shareholder, which can simply be yourself. You can appoint yourself as the director and be the sole shareholder in your company.

• You will need to provide a statement of capital which sets out:
• The number of shares your company has and their total value (the share capital)
• The names and addresses of all shareholders

To start, you could issue 100 ordinary shares, each valued at £0.01, resulting in a total share capital of £1. As your company grows, you can execute a share split and attract additional shareholders or investors if you wish to raise funds.

4. You need to identify people with significant control over your company

You need to add some details on all person with significant control in your company. A person with significant control (PSC) is someone who owns or controls your company. Basically, it is anyone with more than 25% voting rights or more than 25% of the shares.

If you are the only shareholder, you are the only PSC.

5. You need to submit your memorandum and articles of association

Upon registering online with Companies House, your company will automatically adopt the Model Articles of Association. These articles outline the governance of your company, including the appointment of directors, quorum for board meetings, shareholder rights, and more.

You can adopt your own Articles but this is very rare. However, these will be changed in the futures if you decide to raise funds.

6. You need to define your registered address

You need to register an official address which should be:

• A physical location in the UK
• In the same country as your company's registration. For instance, a company registered in Scotland should have a registered office address in Scotland.

Remember, all written communication will be sent to this address. If you opt to use a third-party agent to manage your mail, they must forward all of your company's mail to you.

7. You need to get your SIC code

Your Standard Industrial Classification (SIC) code identifies the nature of your new company's business. The Office of National Statistics uses these codes to gather data about various business types in the UK.

You can find the Standard Industrial Classification of Economic Activities (SIC) and their descriptions on Companies House website.

8. You can Register at Companies House and register for Corporation Tax

Once you have the answers to all the questions above, you are finally ready to register your business on the Companies House Registration Portal.

Alongside the registration of your business, you’ll automatically be registered for Corporation Tax at the same time and receive your Unique Taxpayer Reference (UTR) number.

9. You can open a business account

After registering your company, you're ready to start your business. This includes opening an account to manage your company's funds.

If you are an online business, opening an incard account will allow you to manage all financial aspects of your business and will allow you to simplify many administrative tasks.

Don’t hesitate to contact us for more information or start your onboarding process here.