Company formation is the process whereby a business is legally registered with Companies House – the Registrar of Companies in the UK. It is also sometimes referred to as incorporation or company registration. The business being registered may be a new-start that has never traded before or it may be an existing organisation or sole-trader business that is restructured as a company. The process is very simple and registering as a company offers many benefits, all of which we will cover in more detail throughout this blog.
There are several types of companies available in the UK. For the purpose of this blog we will restrict our focus to the most popular type – a private limited company.
Why you would form a company
The main reason for company formation is the financial protection offered to the owners of a business by way of limited liability. Private limited companies can be limited by shares or by guarantee, and company formation allows a business to become a separate legal entity in its own right, completely distinct from its owners. This means the company itself can enter into contracts and is responsible for its own finances – the owners of the business are not personally liable for the company’s debts, financial obligations or legal claims beyond the value of their shares or the amount of any guarantee. This differs greatly from sole-trader businesses for which there exists no legal distinction between the business and the owner – a sole trader is wholly responsible for all debts the business runs up or any claims made against it because there is no separation between personal finances and business finances. Put simply: if the sole-trader business owes money, the owner owes money; if a limited company owes money, the owners owe no more than the value of their shares or guarantee.
Furthermore, company formation provides a business with a corporate image. Limited status makes a business appear larger, more established, professional and reliable. As a result, an incorporated business will be deemed a safer bet for potential investors, lenders, clients and suppliers. Many larger firms and organisations are reluctant to get involved with unincorporated businesses; therefore, registering as a limited company can open many doors and further the potential of your business.
The company formation process
Registering a limited company is far easier than you may think, particularly if you use the services of an online formation agent, rather than registering through the incorporation services provided by Companies House. Formation agents are specialist companies that act as e-Filing partners of Companies House. You will simply be required to fill out an online application form with the details of your new company and this will be electronically submitted to Companies House for approval. Typically, your new company will be registered and ready to trade within just 3 hours and the associated costs are far less than using Companies House registration services.
To form a limited company you must have:
- A company name – this will be the legally registered name of your new company and it must not be ‘the same as’ or ‘too similar’ to the name of any existing registered company. You can easily check the availability of your desired name by entering it into an online name check-tool provided by any formation agent or Companies House.
- A registered office address – This will be the official address of your new company and it will appear on the public register of companies after formation. The address cannot be a PO Box and it must be an address in the same jurisdiction in which your company is registered, i.e. England and Wales, Scotland or Northern Ireland. You may use your home address but most people prefer to keep this information off the public register, by using an alternate registered office address.
- At least one director aged 16 or over – The role of the director is to manage the company’s day-to-day activities lawfully and in the best interests of the company alone. Provided at least one director is a natural person (i.e. a human!) you may appoint other companies as directors. There is no limit to the number of individuals or companies appointed as directors.
- At least one shareholder or one guarantor – Shareholders or guarantors are the legal owners of a company and known as ‘members’. There is no limit to the number of members a company has and they may be individuals or other companies.