Introduction to Company Formation | 121CompanyFormation.co.uk

Company formation involves incorporating a business as a limited company (whether limited by shares (Ltd), limited by guarantee (Ltd) or a limited liability partnership (LLP)) and registering this legal entity at Companies House.

Although referred to as a company, once it has been incorporated the law views it to be an individual entity which holds and owns its own assets, liabilities, property, finance and contractual obligations as distinct to these being owned by the individual shareholders of the company.

This is one way in which limited companies differ from sole trader enterprises whereby the owner of this type of business does personally also own its assets, liabilities, property, finance and contractual obligations

What are the benefits of incorporating a limited company?

  •   It limits the financial liability of the shareholders should the company become insolvent or face liquidation in the future, i.e. they have limited liability
  •   Because the company itself is a separate legal entity that is owned by the shareholders, guarantors or members depending on the type incorporation, this means that each shareholder or guarantor is only responsible for the amount of company debt equal to the value of their own shareholding thus their personal finances are protected.
  •   Limited companies give the impression of being a professional business by having recognised shareholders and directors whose duty it is to run the business responsibly
  •   Shareholders, guarantors and partners of limited companies are able to manage their personal remuneration in the most tax efficient way
  •   The process of incorporating a limited company is easy and affordable

Companies House

Companies House oversees and ensures the compliance of all UK registered company under company law which varies depending on the jurisdiction of the registrar – companies incorporated in England and Wales fall under the umbrella of the Cardiff registrar, companies incorporated in Scotland fall under the Edinburgh registrar and those incorporated in Northern Ireland are responsible the Belfast registrar.

As well as processing all documentation relating to the incorporation and dissolution of companies, all statutory documentation relevant to currently trading limited companies is submitted to Companies House for acceptance and registration. This is made available to the general public as is information about limited companies that have traded in the past but have now ceased operations.

The different types of limited company in detail

Limited by shares

The majority of new companies that are incorporated in the UK are ‘Limited’ (abbreviated to Ltd) because this private limited company structure is used by businesses who intend to generate profits, in the form of dividends or salaries, for their shareholders which can be extremely tax efficient.

Another reason this type of company is popular is because it limits the financial liability of the shareholders should the company become insolvent or face liquidation in the future. Because the company itself is a separate legal entity that is owned by the shareholders, this means that each shareholder is only responsible for the amount of company debt equal to the value of their own shareholding thus their personal finances are protected.

Other benefits of a private limited by share company include:

  •   They can be incorporated with just one director and one shareholder who can be the same individual
  •   For companies incorporated In England and Wales, any number of shares of any nominal value can be issued and these can be expressed in any currency
  •   Capital can be raised through the issue of new shares
  •   A corporate entity can hold the position of either a director or shareholder or both
  •   There is an option for the ownership of a private limited company to be passed on in perpetual succession even if the current owner dies, becomes insolvent or bankrupt because the shares can be transferred to new or existing shareholders at any time
  •   The name of the limited company is unique to it and no other company or entity can register with either the same name or one that is deemed too similar by Companies House
  •   Limited companies give the impression of being a professional business by having recognised shareholders and directors whose duty it is to run the business responsibly
A limited by share company must have the following:
  •   Registration at Companies House
  •   At least one director who is over the age of 16
  •   At least one shareholder (who can also be the sole director)
  •   A registered office which is within the country of incorporation
  •   Memorandum and articles of association

Limited by Guarantee

Limited by guarantee is a type of company formation used mostly by non-profit or not-for-profit organisations such as a sports club or association, an organisation that entails membership or a workers’ co-operative, i.e. one that does not intend to make a profit.

This type of company has guarantees and guarantors instead of shares and shareholders. Unlike shareholders who often take a dividend out of a company, guarantors do not take any share of the profits of a limited by guarantee company allowing any such profits to remain in the company to further its objectives but they do guarantee to pay a certain amount of money towards the debts of the company.

The advantages of a limited by guarantee company is that, because it has members who act as guarantors rather than shareholders/owners, this means there is limited financial liability for the guarantors’ own personal finances which remain protected should the company face financial difficulties or any legal process.

A limited by guarantee company must have the following:

  •   Registration at Companies House
  •   At least one member who is over the age of 16
  •   At least one guarantor (who can also be the sole director)
  •   A registered office which is within the country of incorporation
  •   Memorandum and articles of association

Limited Liability Partnership (LLP)

Many professional businesses, such as solicitors, accountants, consultants and doctors, that have traditionally operated in partnerships form a Limited Liability Partnership (LLP) to reduce their exposure to personal financial loss.

Unlike companies limited by shares and companies limited by guarantee, LLPs do not have shareholders or guarantors. Instead, this type of company has members of which there must be at least two although there is no maximum limit.

The profits from the LLP are shared amongst its members with each member, who can be resident and work from anywhere in the world, being responsible for paying any income tax or National Contribution payments on these drawings and also being responsible for their own debts within the LLP.

A limited liability partnership must have the following:

  •   Registration at Companies House
  •   A minimum of two members who are over the age of 16
  •   A registered office which is within the country of incorporation
121 Company Formation offers a wide range of online packages for the incorporation of limited companies in England and Wales, Northern Ireland, Ireland and Scotland as well as providing accountancy services and a registered office address service using our prestigious central London address.

Could my application to incorporate a company be rejected?

Yes this can and does happen for a variety of reasons, all of which 121 Company Formation can quickly resolve although we would normally spot any errors or omissions when we review your application prior to its submission to Companies House.

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