Introduction to Company Formation | 121CompanyFormation.co.uk

Company formation involves incorporating a business as a limited company and registering it as a legal entity at Companies House. There are three options when it comes to the constitution of a limited company:

  1. Limited by shares (Ltd) (and Limited by shares for non-UK residents)
  2. Limited by guarantee (Ltd) or
  3. A limited liability partnership (LLP))

Although referred to as a company, once incorporated the law views the business as an individual entity that holds and owns its own assets, liabilities, property, finance and contractual obligations (i.e. it would be incorrect to say that a company's assets are owned by the shareholders of the company).

This is one way in which limited companies differ from sole trader enterprises where the business owner owns the assets, liabilities, property, finance and contractual obligations.

WHAT ARE THE BENEFITS OF INCORPORATING A LIMITED COMPANY?

  •   The process of incorporating a limited company is easy and affordable
  •  It limits the financial liability of the shareholders should the company become insolvent or face liquidation at any time (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. Ultimately, their personal finances are protected.
  •  Limited companies have the gravitas of a professional business operation 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
 

COMPANIES HOUSE

Companies House oversees and ensures the compliance of all UK registered companies under company law. This can vary 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 fall under the responsibility of the Belfast registrar.

Companies House processes all the documentation relating to the incorporation and dissolution of companies and all statutory documentation that relates to limited companies that are currently trading. This information, and information about limited companies that have traded in the past but have now ceased operations are made available to the general public.

DIFFERENT TYPES OF LIMITED COMPANIES

Limited by shares

The majority of new companies that are incorporated in the UK are ‘Limited’ (abbreviated to Ltd). The private limited company structure enables companies that generate profits to pay their shareholders using a tax efficient blend of salary and dividends.

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 at any time. Because the company is a separate legal entity that is owned by the shareholders, each shareholder is only responsible for the amount of company debt equal to the value of their own shareholding, i.e. 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 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
  •  Because shares can be transferred to new or existing shareholders at any time, there is the 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
  •  The name of a limited company is unique and no other company or entity can register with either the same name or one that Companies House deems too similar
  •  Limited companies have the gravitas of a professional business operation 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 that is used mostly by non-profit or not-for-profit organisations such as sports clubs/associations, organisations that are member-based, or workers’ co-operatives, i.e. companies that do not intend to make a profit.

This type of company has guarantees and guarantors instead of shares and shareholders. Unlike shareholders who often take dividend (payments) out of the company, guarantors do not take any share of the profits of a limited by guarantee company which allows any such profits to remain in the company to further its objectives. However, Guarantors must guarantee, i.e. are required to pay a certain amount of money towards any debts the company incurs.

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

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 tend to form a Limited Liability Partnership (LLP) to reduce their exposure to any personal financial loss.

Unlike companies limited by shares and companies limited by guarantee, LLPs do not have shareholders or guarantors but members. In this company structure there must be a minimum of two members. There is no maximum number of members that the company can have. Members can reside and work from anywhere in the world.

The profits from an LLP are shared amongst its members. The company’s members are required to pay income tax and/or National Contribution payments on these drawings.

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 to incorporate a new company in England and Wales, Northern Ireland, Ireland and Scotland as well as a wide variety of additional business support services including business bookkeeping and accountancy services, and a registered business address service using our prestigious Shelton Street Covent Garden address.
 

COULD MY APPLICATION TO INCORPORATE MY COMPANY BE REJECTED?

Yes, this can and does happen for a variety of reasons. 121 Company Formation thoroughly reviews every application before we submit it which allows us to identify and address any errors or omissions prior to submission. In the unlikely event that your application is returned due to an error or omission we can address and resolve it quickly

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