Your guide to setting up a limited company

If you’re starting a new business, setting up as a sole trader can be the easiest way to go. However, if you’ve been trading for a while, you may wish to consider becoming a limited company. Here’s how to do it.

Key steps:

• Check if it’s the right decision for you

• Choose your company name

• Register your company

• Appoint a director

• Select your shareholders

• Create your company documents 

• Understand which records you need to keep

• Find out what tax you need to pay and when

• Open a business bank account

• Obtain the relevant insurance and licences

What is a limited company?

A limited company provides a more formal business structure than the sole trader model. It makes a business a distinct legal and financial entity that’s separate from those who run it. This means that as a company director, you have limited liability, and you won’t be personally responsible for financial losses as you would if you were a sole trader. 

However, being a limited company also means any profits belong to the company and, to receive an income, you need to withdraw money as a salary or dividend payments.

10 steps for setting up a limited company

We’ve outlined the key steps for setting up your limited company below:

1. Check if it’s the right decision for you

Firstly, ensure you’ve considered the pros and cons of setting up as a limited company and understand the different types of business ownership to ensure a limited company is the right structure for you. 

Setting up a limited company might make sense if you’re a higher-rate taxpayer as you pay corporation tax on your profits rather than income tax on your earnings. It can also be suitable if you’re looking for more ways to fund your business, you want to hire more staff, or you think you might sell your business one day.

2. Choose your company name

Next, you need to choose your company name. This should be unique to your business and not too similar to other companies. 

It’s worth carrying out a search on Google and checking the Companies House register for a list of businesses with similar names. The name must end in ‘Limited’ or ‘Ltd’ – although if you trade using a different name to your registered name, this shouldn’t include ‘Limited’ or ‘Ltd’. 

Your company name must not be offensive or imply you hold professional qualifications that you don’t have.

3. Register your company

You can now register your company with Companies House. To do this, you need to register an official address and a standard industrial classification of economic activities code (SIC), which identifies what your company does. You can check what this code should be for your business on the gov.uk website. 

Registering online costs £50, and your company is usually registered within 24 hours. Alternatively, you can register by post using form IN01. Registering by post costs £71, and postal applications usually take up to 10 days to process.

It’s also possible to use an agent or third party to help you register your company. They can take care of all the paperwork on your behalf. 

Once you’ve registered, you should receive a certificate of incorporation to confirm that the company legally exists, as well as your Unique Taxpayer Reference (UTR). 

If you’ve registered online, you can register for corporation tax at the same time. You must do this within three months of starting to trade so you can file your company tax return. 

Read more: 

• When to register a business 

• Next steps after registering a business 

4. Appoint at least one director

Your company must have at least one director. As the owner of the business, this could be you. Company directors are legally responsible for company records and accounts, as well as ensuring the company pays its corporation tax on time.

If you wish to, you can also appoint a company secretary to ensure the company follows regulatory requirements. This isn’t a legal requirement for private limited companies, but is necessary for public limited companies (those listed on a stock exchange). 

5. Choose your shareholders

A limited company must have at least one shareholder who can also be a director. If you have more than one shareholder/director, you should ask a solicitor to draw up a shareholder’s agreement to state how you plan to share profits between salary and dividends. It also needs to outline what you intend to do if one partner is unable to work or dies.

6. Create your company documents 

There are two other key documents your company should have. These are:

• The memorandum of association: A legal document signed by all shareholders agreeing to register a limited company.

• Articles of association: Written rules about running the company, agreed by shareholders, directors and the company secretary. If you register your company online, this is automatically created for you.

7. Find out what records you need to keep

You must keep records about the company itself, as well as financial and accounting records. These records must be kept for at least six years, but you don't have manage them alone – you can hire an accountant to help with this task. Record-keeping is important because HMRC may ask to ‘check your books’ to ensure you’re paying the right amount of tax. 

Check the government website for the full list of required records. 

8. Understand tax

As a limited company, you must pay corporation tax on business profits. You pay 25% corporation tax (the main rate) on profits over £250,000 and 19% for taxable profits below £50,000 (the small profits rate). 

You might qualify for marginal relief if your company has profits between £50,000 and £250,000 – this provides a gradual increase in the corporation tax rate between the small profits rate and the main rate.

You must file a company tax return each year by the deadline given to you by HMRC. If your company pays any salaries, you need to register for PAYE, and if your business turnover is more than £90,000 (previously £85,000) in any 12-month period, you must register for VAT. It can be worth registering for VAT even if you don’t have to.

Read more: Managing VAT for small businesses

9. Open a business bank account

Limited companies must open a business current account – you cannot use a personal account for business purposes. 

Opening a business account ensures your business finances are kept separate from your personal transactions, which saves time and effort when filing your company tax return. As well as helping you track business expenses, the right type of business bank account can integrate with accounting software, automatically chase and send invoices on your behalf, and offer a range of budgeting tools and rewards to help your business thrive.

10. Consider what insurance and licences you need

Finally, you should consider taking out insurance designed for limited companies and investigate the licences you need. 

• Employers’ liability insurance is a legal requirement if you employ one or more members of staff. This covers the cost of compensation claims in the event someone suffers an injury or falls ill due to the work they do for you

• Public liability insurance protects you against legal costs if a member of the public, customer or client sues you due to an injury, or because of property damage caused by your business activities 

• Professional indemnity insurance protects you if a client claims against you due to failings in the products or services you’ve provided

• Business interruption insurance protects you if your business can’t trade as normal, while cyber insurance covers you against scams and cyber attacks.