How to set up a limited company in the UK

When you first set up in business it’ll most likely be as a sole trader, which means you’re essentially self-employed.

However, after you’ve been trading for a while it may make more sense to set up a private limited company.

The formation of a limited company (Ltd) is quite straightforward, but it's important to know how your legal position, financial arrangements and other responsibilities will change.

Discover everything you need to know about private limited companies and how to set them up below.

What is a limited company?

A limited company is a business structure that is a separate legal and financial entity from the person or people running it (i.e. the company directors).

The main advantage of this is that a company has limited liability. Limited liability means that if your business fails or is sued, you are only liable for the face value of your share in the business. Beyond that, your personal assets are protected.

A limited company has one or more directors, has its own bank account(s), pays its own kind of tax, can be bought and sold in the form of shares, and must be registered at Companies House.

Why set up a limited company?

The big advantage of a limited company is that it ensures limited liability.

The company is a separate legal entity (it has its own bank account etc.) so as company director, you can’t lose more than the face value of your share in the business.

This overcomes the main disadvantage of being a sole trader, which is that your personal finances aren’t fully separated from your business finances.

This means that if your sole trader business runs into difficulties or is sued, your personal assets would be at risk. With a limited company, your personal assets are protected.

Another good reason for setting up a company is that companies pay a lower rate of tax on their profits.

Learn more: what are the pros and cons of a private limited company?

When should I change from sole trader to limited company?

Being a sole trader is a good way to test your business model, check that it works and refine it.

There are no registration fees and very little admin, and you make all the decisions without having to consult other directors or shareholders.

However, you pay income tax on your profits rather than corporation tax, and you are personally liable for the business debts.

This means that as your turnover increases, it can make more sense to form a private limited company instead.

Forming a company also opens up more ways to fund your business.

As a sole trader you can take out business loans from banks, but you cannot get private equity funding (i.e. selling shares in your business). With a company, you can do either or both.

Can I set up a limited company on my own?

Yes, you can set up a company in which you are the sole employee and only director.

Most contractors choose to operate as companies, as it reduces the risk that their clients will have to treat them as employees for tax and legal purposes.

It also protects contractors from heavy personal losses if they are sued by clients.

Another option for contractors is to operate out of an umbrella company, where the company adminstration is done for them.

How to set up a limited company in 7 steps

Here are the key stages involved in forming your company. 

1. Check it’s right for you

Make sure a company is the most suitable structure for your business. You can check the pros and cons here.

2. Choose your company name

Your company name must be available (i.e. unique, and not too similar to an existing company).

The name must not make false implications (e.g. imply regulation or approval by a body where none exists) and must not be offensive.

Note that you can trade under a different name, but you can’t add ‘Ltd’ to this name if it isn’t your registered name.

3. Appoint at least one director

Your company must have at least one director (i.e. you) but can have several.

Directors collectively agree decisions for the company, must follow its rules and have ultimate responsibility for filing the accounts and ensuring the company pays its corporation tax.

You can also appoint a company secretary, though this isn’t compulsory.

The company secretary ensures that the directors’ decisions are carried out, ensures that the company follows regulatory requirements, and handles other company administration duties.

4. Decide who will be shareholders

A company must have at least one shareholder, who can be a director.

Shares can be divided among the directors (not necessarily evenly). Shareholders typically vote on decisions at shareholder meetings, with one share equalling one vote, so majority shareholders have more influence.

A shareholder with more than 25 per cent of the shares is a ‘person of significant control’ (PSC).

5. Create your company documents

Your company must have certain documents that recognise its formation and set out how it is to be run. These are:

• The memorandum of association: This is a legal statement signed by all initial shareholders stating that they agree to form the company together.
• The articles of association: These are the rules on how the company is to be run, agreed by the shareholders, directors and company secretary. You can use model articles of association or write your own.

6. Confirm what records you need to keep

You will need to keep records of all significant details about the company, including its PSCs, as well as all its accounting records. Records must be kept for at least six years.

Find out more on the government's website.

7. Register with Companies House

Finally, register your company and its official address at Companies House. Be sure to select the correct SIC code, as this specifies the nature of your business. You can register for corporation tax at the same time.

How to register a limited company in the UK?

You can register your company with Companies House online or by post using form IN01.

If you choose not to use ‘limited’ in your company name you must register by post.

The company will usually be registered within 24 hours of receipt of your application, if you do it online. Postal registrations can take up to 10 days.

Once you’ve registered your company, a ten-digit Unique Taxpayer Reference (UTR) will be posted to your company address within a few days.

You’ll need this, so keep it safe. You will also receive a ‘certificate of incorporation’, confirming that the company legally exists.

This document also includes the company number and date of formation.

How much does it cost to register a company?

It costs £50 to register your company online. Postal registrations normally cost £71. You can pay £78 for a same-day software registration if you wish.

What taxes will my company pay?

Your limited company must pay 25% corporation tax on its profits over £250,000 (main profit rate) and 19% for taxable profits below £50,000 (Small profit rate). Once your company is registered with Companies House, you must register it for corporation tax within three months of it becoming active (you can do both registrations at the same time).

Being active means that your business is providing services and receiving income - this is also known as 'trading'. If you’re unsure if this applies to your company, check with your accountant.

If you register too late for corporation tax, you could receive a fine.

You will need to file a company tax return annually, by the deadline given to you by HMRC. You’ll also need to register for PAYE if the company pays any salaries (including your own as Director).

Your company may also need to register for VAT, or you may wish to do this even if you don't have to.

Find out more about tax for small businesses.

How long does it take to set up a limited company?

Setting up a limited company in the UK takes very little time. If you choose to set up your limited company by post, it can take between eight and 10 working days.

However, there are a number of businesses out there who specialise in setting up a limited company online, which can take a matter of hours.

How will I get paid through my limited company?

There are two main ways in which you, as director, can take an income from your company.

You can take a salary, or you can pay yourself dividends out of company profits. Most directors choose a combination of the two, as this can be most tax-efficient.

The advantage of dividends is that less tax is due on them. However, you can only pay them out of profits, and there are some other drawbacks too.

The advantage of a salary is that it entitles you to various other benefits (such as the state pension and maternity or paternity benefits) and doesn’t require the company to be in profit.

However, salary is taxed at a higher rate.

Find out more about taking an income from your company.

What are the legal responsibilities of running a limited company?

As a director you’ll have some legal responsibilities, including managing accounts and informing other shareholders if you stand to benefit personally from any company transactions.

You can of course appoint an accountant and/or company secretary to perform these tasks on your behalf – just remember that the buck stops with you.

If you’re setting up a company from scratch (i.e. you’re not already established as a sole trader) then you may also like to consult our guide to starting a business.

Year-end reporting for your company

At the end of your financial year you must report key information to HMRC and Companies House.

This ensures that the company pays the tax it owes, and also provides accurate information about the company to its shareholders, investors, creditors and the general public.

Find out more about financial year-end reporting.

Get expert financial advice

Setting up a limited company can offer numerous advantages, from limited liability to potential tax benefits. This makes it a compelling choice for many business owners. While the process is relatively straightforward, it’s crucial to understand the associated responsibilities, from financial reporting to legal obligations.

By following the outlined steps and staying informed about your ongoing duties, you can ensure that your limited company is well-positioned for success and compliant with UK regulations.

Let Unbiased match you with a financial adviser for expert financial advice to help you navigate the complexities of setting up a limited company and making the most of your new business structure.