Introduction to company formation in the UK
The latest official figures show there are 5.5 million private sector businesses in the UK. Of those there are:
- 3.1 million are sole traders,
- 2.1 million are actively trading companies,
- 353,000 ordinary partnerships.
What is a UK company?
A company is a separate legal entity registered at Companies House, independent from its owners.
People often use the terms 'company' and 'business' as meaning the same thing, despite the official definitions.
Steps to form a company in the UK
Choosing a company name
The name you choose for your company is not just a label. It is also a brand, a commitment, and a narrative.
If you are a sole trader, you can trade under your own name, or choose another name. Using a registered trade mark without permission could lead to legal trouble.
‘Sensitive’ words or those that suggest a connection with government or local authorities need permission.
A company name must end with 'Limited' or 'Ltd' or 'Cyfyngedig' and 'Cyf' if registered in Wales.
A limited company name cannot be the same as another registered company’s name. You can determine if a company name is available using the checker on Companies House's website.
Determining the type of business
Before beginning your business journey, you need to decide which business or company structure is most appropriate for you.
A sole trader is the simplest business structure. It involves limited administration and does not require registering with Companies House.
A sole trader is personally responsible for debts and legal action taken against them. They do not classify as a separate legal entity.
A partnership is a business run by two or more people who share ownership and responsibilities.
There are three types of partnerships:
This is the simplest form of partnership. Like sole traders, an ordinary partnership is not a separate legal entity. It is a group of two or more people running a business together who share equal responsibility.
A limited partnership is also not a separate legal entity. It must have at least one general partner and one limited partner.
General partners have unlimited liability with full responsibility for the day-to-day running of the business and its debts. Limited partners have limited liability to the amount of money they have invested in the business.
Limited liability partnerships (LLP)
An LLP is a separate legal entity, so partners are not personally responsible for debts the partnership can't pay.
An LLP needs at least two members in charge of legal obligations, like submitting yearly accounts to Companies House.
A limited company is separate from its owners, the directors and shareholders are not responsible for its debts. The directors and shareholders have protection from personal financial liability.
A limited company needs at least one director and one shareholder, who can the same person.
Registering with Companies House and HM Revenue & Customs (HMRC)
Once you've decided on the type of company, it's time to make it official.
Registering with Companies House is mandatory for limited companies, limited partnerships and limited liability partnerships.
To register a limited company, you need to provide details of directors and shareholders or guarantors. For each person, you need to provide three personal details. These details may include place of birth, mother's maiden name, telephone number or National Insurance number.
You might also want to appoint a company secretary but this is not compulsory.
Sole traders, partners and partnerships need to register with HMRC to pay tax via self assessment. You must tell HMRC by 5th October in your business’s second tax year.
When starting a limited company, you need several documents.
If you choose to not register a limited company online, you need to complete form IN01.
In England, Wales, and Northern Ireland, a limited partnership must register with Companies House. You complete the registration using form LP5. However, in Scotland, you complete the registration using form LP5(S).
You register a limited liability partnership at Companies House using form (LL IN01). You need to provide various details including your designated members and registered address.
Memorandum of Association
The first shareholders or guarantors sign this document. The document confirms the signatories wish to form and become members of the company. If you register the limited company online, the system will automatically create the Memorandum of Association.
Articles of Association
This document outlines the rules agreed by the directors, company secretary and shareholders with regards to the running of the company.
There are various legal requirements for a limited company. The company directors oversee these.
- maintain the company’s rules, as shown in its articles of association
- keep company records and report changes
- file annual company accounts and company tax return
- pay corporation tax
- submit quarterly VAT returns, if the company is registered for VAT
The limited company filing deadlines to remember are:
|File your first accounts with Companies House||21 months after the date you registered with Companies House|
|File your annual accounts with Companies House||9 months after your company’s financial year ends|
|Pay Corporation Tax or inform HMRC that your limited company does not owe any||9 months and one day after your ‘accounting period’ for Corporation Tax ends|
|File a Company Tax Return||12 months after your accounting period for Corporation Tax ends|
|File your Confirmation Statement||
Your 12 month review period begins on either:
Sole traders and ordinary partnerships must:
- submit a tax return for individuals and the partnership by 31st January (31st October for paper filing) to HMRC
- pay income tax on profits and Class 2 and Class 4 National Insurance
- submit quarterly VAT returns, if the sole trader or partnership are registered for VAT
For limited liability partnerships, designated members must:
- send an annual Self Assessment tax return for the business and as an individual to HMRC
- send annual accounts to Companies House
- submit quarterly VAT returns, if the partnership is registered for VAT
Benefits of forming a company in the UK
Forming a limited company in the UK offers several benefits. The advantages include:
A limited company is separate from shareholders and directors, so you are not personally responsible for any business losses.
More tax efficient
Individual business owners pay income tax ranging from 20% to 45%. On the other hand, companies pay up to 25% corporation tax. This may be a more tax efficient option. There are also a wider range of allowances and tax deductible expenses for limited companies.
Access to finance
It is easier to obtain funding for your business if you have a limited company rather than being a sole trader. This is because of the legal protection and tax advantages that come with having a limited company.
Being a limited company can encourage more confidence and trust. Some suppliers prefer to not work with non-limited companies.
Limited companies have drawbacks, so consult your accountant to determine the best business structure for you.
Common mistakes and how to avoid them
While opportunities pave the road to company formation, pitfalls also exist.
Common mistakes include:
- Neglecting legal requirements: Failing to meet deadlines for tax returns, annual accounts and other documents can result in financial penalties. Staying on top of the deadlines, working with your accountant and filing early will help you to avoid this.
- Inefficient market research: Fully understanding the market your business serves will help you to grow it. Effective market research methods include surveys, polls and focus groups, consulting industry reports, analysing competitors and checking your sales data.
Common questions about company formation in the UK include:
How long does it take to form a company in the UK?
If everything is in order, it can take as little as 24 hours.
Do I need to be a UK resident to form a company?
No, there's no requirement to be a UK resident.
What's the difference between a 'limited' and 'public' company?
A limited company doesn't offer shares to the public, while a public one does.
How often do limited companies and limited liability partnerships need to submit accounts?
Annually. Make sure you don't miss the deadlines.
Can I change my company name after registration?
Yes, although there's a process through Companies House and it comes with its own set of requirements.
Need advice about UK company formation?
TaxAssist Accountants can help you with a range of services. These include company formation, preparing company accounts and tax returns, calculating corporation tax, and providing tax planning services.
Date published 2 Oct 2023This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
Dan is a freelance journalist and event host who writes content for TaxAssist Accountants. With 20 years of experience, he has interviewed hundreds of entrepreneurs from famous names like Sir Richard Branson and Deborah Meaden to the founders behind the newest start-ups. Dan was previously Head of Content at small business membership organisation Enterprise Nation.
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