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Forming a Company

A BUSINESS OF YOUR OWN

Setting up a company which you own, manage and develop yourself is a wide-spread ambition. There are many attractions - independence, challenge and excitement; meeting new people and new situations; financial rewards if the business 'takes off'.

Equally though, an 'own' business means hard work, determination, new obligations and responsibilities. Each new situation needs research, judgment, decision-making - then standing by the consequences and reaping the rewards.

A COMPANY OF YOUR OWN

Whether to form a Company, and how to go about it, are questions which can be time-consuming and confusing.

This guide will help you understand what a Company is all about: The Benefits, Obligations, and How To Set It Up. The guide is user-friendly yet comprehensive and covers everything you should know about forming a Company - including the pitfalls, which our service will ensure you avoid.

THE UNIQUE QUALITY OF A COMPANY

There is just one highly significant difference between a Company and a Sole Trader business (or a Partnership). This concerns the role of the owner - and all other differences are a consequence of this role.

As a Sole Trader or Partnership you and the business are one - in one common 'pot'. You own the goods you supply, your customers owe money to you. You personally make a profit, you are taxed personally upon it. You are liable for business debts and any losses are yours - in a Partnership you're liable for your Partner's debts and actions as well. The relationships between your business and your customers, your creditors, HM Revenue & Customs, Customs & Excise and so on, are all in fact with you personally.

A Limited Company is completely different. A Company is a totally separate Corporate Body. The Company provides goods and services and is owed directly for these. It takes on debts and owns or leases property. If it makes a profit, the Company pays Corporation Tax. All these transactions are distinct from you - even though your day-to-day practical activities may be almost precisely the same as when you are - or were - a Sole Proprietor. In fact, you're right out of the 'pot'.

When you form a Company, you become its owner. It is an asset - like property - which you can dispose of as you wish. As a Director, you become an employee of your Company, creating its success and value, and taking a salary and profit after tax. But, now, you are not responsible for its losses if things do go wrong.

This protection from loss - Limited Liability - is the most significant advantage of trading as a Company. But it brings obligations; responsibilities to the public which you are legally obliged to fulfil - and with penalties if you don't!

THE ADVANTAGES AND DISADVANTAGES OF A COMPANY

Limited Liability

If business fails, limited liability can protect the owner of a Company from personal loss, or even bankruptcy, which a sole trader could not avoid. Unless you have given any personal guarantee for a particular transaction - or acted illegally - the debts are the Company's, not yours.

This advantage increases with the growth in commitments the business makes in order to operate and develop.

Commitments and liabilities for raw materials, wages, premises or leases, often made before payments are received, are better covered under limited liability.

A Unique Trading Name

When a Company name is registered it has to be unique. For as long as the Company exists, the name can never be copied by another Company. In contrast, Sole Trader names have no Statutory protection and can be copied, although the private National Business Register now provides considerable protection.

Prestige and Status

There is something about owning a 'Company' which owning a 'business' just doesn't quite have. A company is seen as having greater prestige and status. This may be partly an image, but it does affect the behaviour of clients, customers, suppliers - and employees.

Ownership and Continuity

The Ownership of a Company is known precisely, so it is easier to value, buy and sell. The owners are listed along with the proportion of the Company (or Shareholding) that they own. The relationships between joint owners are consequently far less complex than most Partnership Agreements.

A Company share can be sold or, for example, given away in a will. But if a sole trader dies, so does the business.

Setting Up Costs

Forming a Company is not expensive, usually a small sum compared with the total investment required to establish a new business.

Published Information

Companies only need to have their accounts audited by a Chartered or Certified Accountant if they have a turnover of more than £1 million and have gross assets of more than £1.4 million. Below those levels companies need only to file limited information called "Modified Accounts".

A company below these thresholds can request an audit, but it is not required. When the information is filed with Companies House suppliers/customers can check up on the financial standing of a company and, because published information is available, many suppliers prefer to deal with a limited company rather than a sole trader who files no public information.

Assets and Income

As a Sole Trader owns the business assets personally, cash 'drawings' can be made as required. In contrast, Company assets belong to the Company and must be used for Company business. 'Drawings' are now taken as a 'Salary' - plus Dividends, after tax.

Taxation and National Insurance

Company Directors are normally employees of the Company paying Tax through PAYE. Although they have fewer personal tax-deductible expenses than Sole Traders (or self employed) under Schedule D Tax, Directors benefit in other ways.

There are many technical differences between Companies and Sole Traders with regard to tax and National Insurance, so talk to your accountant before deciding which is most advantageous for you.

FORMING A COMPANY IN PRACTICE

There are several types of Company: Public Limited Companies (PLC's), Companies Limited by Guarantee, Off-Shore Companies and others. National Business Register Company Services can advise you on all of these, but what follows concerns the most usual form - the Private Limited Company.

The creation and running of a Company is governed by various Companies Acts and for formation every Company must have:

1. A Unique Name

The Company name must not be identical to any other.

2. The Right People
Owners: 'Members' or 'Shareholders'

A company has to be owned. It need have only one owner but there are normally at least two. Owners are technically Members. All Members have some Share in the business as Shareholders and they must be listed in a Register of Shareholders.

Managers: 'Officers' or 'Directors'

Owners must appoint Officers to manage the business. These are the Directors. In most Companies, Directors are also the Shareholders. A Company must have at least one Director and a Company Secretary may be appointed if you wish. If there are two or more Directors, one of them can also be Company Secretary.

A 'Company Secretary'

A Company Secretary may be appointed by Shareholders as the Officer of the Company specifically responsible for maintaining all statutory information about the Company.

3. A Specific Location -The Registered Office

This is the legal address of the business (not necessarily its trading address) at which Companies House, HM Revenue & Customs, customers, suppliers and the public can serve documents and assume that they have been received by the Company Directors. Details of Shareholders and Officers must also be available for public scrutiny at this address.

4. Clear Objectives -the Memorandum and Articles of Association

The nature of the business the Company will carry out, along with other details, must be clearly defined in a document called the Memorandum and Articles of Association.

HOW YOU FORM YOUR COMPANY

When you have decided to form a Company and you know who the Owners, Directors and Company Secretary will be, formation is relatively straightforward. Now though, there are many details to sort out. Most people find that specialist advice is necessary to ensure that Registration is achieved quickly and efficiently.

The following information is needed to Register your new company:

The Company Name

The People
Names of the First Shareholders
Names of the First Directors
Name of the Company Secretary

The Registered Office Address

Memorandum and Articles of Association
Objectives
Shareholding
Details Declaration of Compliance

These details can be conveniently completed using the National Business Register application form.

The Unique Name

The Company Name can be almost any name you want, although there are some specific limitations laid down in Company Law.

A Company name must not:
i) Be the same as another on the Register. Check this by carrying out a Name Search through National Business Register.
ii) Contain the words Limited, Unlimited, or Public Limited Company except at the end of a Name.
iii) Be offensive.
iv) Constitute a criminal offence.
v) Give the impression that the business is connected with the Government or a Local Authority.

What to watch out for

There are certain 'Words and Expressions' for which special permission must be obtained from the Secretary of State or from other Institutions. Words like International, Royal, Architect and so on. The idea is to stop Companies implying that they are bigger than they actually are or supply services that they don't - check with National Business Register on your choice of name.

Beware of creating a Name which is Similar To or Too Like another Company Name. An existing Company has twelve months in which to complain to the Secretary of State that a new name is 'too like' theirs. Many new Companies have had to change their Name at this point - a potentially expensive experience. Names can be considered 'too like' if they are phonetically identical, use similar spelling, have a similar Distinctive element, or are similar in other ways. Companies House will not check for 'Similar' names, only 'Identical' names. So choose extremely carefully and use National Business Register's specialist search facilities

Beware of Passing-Off. This happens when one business - whether a Company or not - copies another, even in ignorance, and causes customer confusion or damage to the existing business. Companies House does not check non-Company business names, Trade Marks or Consumer Credit Act licences, and owners of any of these can sue if you copy. We therefore can carry out comprehensive searches on your behalf before we form your Company.

If your business is likely to require a licence under the Consumer Credit Act (see Page 6), its name must be different to all other licenses registered with the Office of Fair Trading. We can check this register as well before finalising your name.

If you trade under a name other than the Registered name, you must comply with the Business Names Act 1985 by disclosing the Company details (Company Name, Number and Registered Office address) at each of the premises occupied and on all letterheads, invoices, receipts and orders.

Once you know the name you want, check with our corporate services team that it is available and possible - for example, that it doesn't exist already and that you won't have any other problems with it!

The People - Members, Directors and Company Secretary

The Members, Directors and Company Secretary will have been decided upon amongst yourselves and can be added to forms where necessary.

What to watch out for

Anyone over the age of 16 can be a Director, unless they are an undischarged bankrupt or subject to a disqualification order. So check out your potential Members if you are not familiar with their background.

The Company Secretary's duties include completion of various annual reports - see page 5. An agent, accountant or solicitor can take on this role for an annual fee. Failure to provide certain information on time, however, is an offence - for example, late filing of Annual Accounts will definitely result in a fixed fine.

A Specific Location - The Registered Office

The Company must be registered in the Region in which you have decided to locate the Registered Office (England & Wales, Scotland or Northern Ireland).

The Registered Office need not be your trading address and Companies often use the address of an accountant, solicitor or National Business Register for an annual fee as their Registered Office address.

What to watch out for

Make sure that you check the annual fee for a 'hired' address and especially that the requirements for public access to information are met

Memorandum and Articles of Association

The Memorandum and Articles set out the Objects, aims and rules for the Company.

What to watch out for

We form companies with a standard objects clause which permits a company to do anything. This is perfectly acceptable to banks and is a legal document. If you form a company with very specific objects then you will be limited to only doing those activities.

Capital and Shares

You must decide on the amounts of both Capital and Shareholding.

The Authorised Capital represents the size of the Company. Many Companies are formed with Authorised Capital of £1,000. The Capital is divided into individual Shares, usually of £1 each. You can then issue as many or as few of these shares as you like. For example, a single member Company could issue just 1 share to that member.

The issue of shares amongst members represents the division of ownership of the Company. For example, to ensure control, one member would need to own 51% of the Shares actually issued.

What to watch out for

Although control is achieved with 51% of ownership, minority holders still have some legal rights. Check with your accountant or National Business Register before finalising arrangements with co-owners.

The Statutory Declaration

A Statement of Compliance , which confirms that all the information supplied for forming your Company is correct, is automatically completed by National Business Register on your behalf and submitted to a solicitor for approval.

YOUR COMPANY ENTERS THE REGISTER

Once this information is supplied on our forms, and assuming that the proposed name appears to be acceptable, We will Register the Company, obtaining a Registration Number, adding it to the Company Register and providing you with a Certificate of Incorporation. This, or a copy, must be displayed at the Registered Office, and a copy will be required by your Bank.

REQUIREMENTS AFTER REGISTRATION

Once your Company is registered, you must immediately meet a number of further requirements.

Nameplate

You must display a Company Nameplate at the Registered Office address.

Statutory Books

The Company must obtain Statutory Books in which to keep the Register of Shareholders, and later the Minutes of Annual and General Meetings etc.

PAYE Registration

HM Revenue & Customs will contact you to register for PAYE purposes. Remember that Directors are employees, so you must register even if you do not employ anyone else initially.

VAT Registration

You must register your Company for VAT, unless the turnover will be below the minimum rate. This can be done by National Business Register or your accountant.

Business Stationery

Now you can print your business stationery. The Company Name, Registered Number and Registered Office Address must be shown on all stationery, plus your VAT Registration Number on Invoices and Statements, etc. If you are trading under a different name, more details are needed to comply with the Business Names Act. Make sure all these details are correct as Directors can lose their limited liability rights if they are incorrect.

Accounting Date

The Company Secretary or your accountant can inform Companies House of the Accounting Date, that is, the end of the Company's first Financial Year.

Share Certificates

We will issue Share Certificates and detail these in the Shareholders Register, which we complete for you.

REGULAR AND ANNUAL REQUIREMENTS

Now that your Company is fully established, there are a number of statutory requirements which must be met on an on-going or annual basis. The Company Secretary is responsible for seeing these are done.

1. Change of Company Details

Companies House must be notified of any changes to Company ownership, Officers or Registered Office address.

2. Registers

The register of Shareholders and Register of Directors must be kept up to date at the Registered Office, and Share Certificates issued as appropriate.

3. Company Meetings

Minutes of Annual and General Meetings must be kept in the Statutory Books.

4. Accounts - Book-Keeping

Books must be kept up-to-date which reflect the current financial position of the Company. Check your systems with your accountant early on.

5. Annual Accounts

Annual Accounts must be prepared for Companies House and the Inland Revenue. These must be signed by a Director and the Company's Auditor. Companies House must have a copy of a Private Limited Company accounts within 9 months of the end of the Financial Year or late filing penalties apply. Audits are only required for companies above a certain threshold.

6. Annual Return

Distinct from Annual Accounts, the Annual Return confirms current details of the Company. Companies House now allows you to file this online for speed.

FORMING OR PURCHASING A COMPANY

Most Companies are formed or purchased through a Company formation agent, such as National Business Register, an accountant or a solicitor, who will cover all the necessary specialist details.

The advantage of professionals is that they can advise on Company names, they have proper systems to carry out Company searches, ensure forms are completed correctly, provide Objects, Memorandum and Articles, Nameplates, Statutory Declarations and so on. However, the range of services varies considerably. Be cautious about saving a few pounds on the basic cost - you may have to change things later, and that can prove expensive.

We provide Companies in two forms: Ready-made, sometimes called Off-the-shelf, or Tailor-made.

Ready-made Companies

The advantage of Ready-made Companies is speed. They are brand new and can trade as soon as purchased - literally within hours. Nominees are registered as Directors and Members and their names are simply replaced with yours. National Business Register has the most comprehensive lists of the best-named Ready-made Companies.

The disadvantage of Ready-made's is that they may not have a Name specifically chosen for the business. You can trade under a different name if you wish, but you must meet the requirements of the Business Names Act, or, at an additional charge, you can change the Company Name to the name you want.

Tailor-made Companies

Tailor-made Companies are produced entirely to the client's requirements, but only take one day to Register. The advantage is having the Name you want and your details on the Register from the start.

Tailor-made Companies are normally formed with your details.

A 'Company Kit'

National Business Register provides your full 'Company Kit' and these contain all the items needed before and after Registration of your new Company. We provide and complete everything as follows:

  • Certificate of Incorporation
  • • 6 sets of Memorandum and Articles of Association with Fully completed statutory books and Company Register
  • Share Transfer Forms
  • Annual Accounting Date notification
  • Completed share certificates
  • Resignation of First Officers
  • Advice regarding the first meeting of Directors

This is all boxed in an attractive attaché case.

NATIONAL BUSINESS REGISTER COMPANY KIT

The National Business Register Company kit is unique and contains all the items fully completed that you need for your Company, neatly packed in an attaché case.

  • National Business Register Company Attaché Case
  • Certificate of Incorporation
  • 6 sets of Memorandum and Articles of Association
  • Completed Register
  • Share Certificates
  • Minutes of First Meeting

THE NATIONAL BUSINESS REGISTER RANGE OF SERVICES

As the leading Company formation agent, National Business Register offers the most comprehensive service available. Whatever your needs, we can supply either a Tailor-made Company or, if speed is of the essence, a Ready-made Company to suit you.

Company Formation

Company formation includes a free Company Name Search, completion of all Registration requirements and provision of a Company Kit - an attractively packed attaché case with all you need to start trading with your new Company.

Registered Office Address Facilities

National Business Register can provide a Registered Office facility in Birmingham and if needed, a Company Secretary.

Company Secretary Service

The role of a Company Secretary is a vital one, but the responsibilities can seem daunting. National Business Register can supply an efficient, professional Company Secretary service and advise Companies House of any change of Company particulars.

VAT Registration

We can also organise VAT Registration for you.

ame Plate

Our service to new Companies extends to the final details such as provision of your Nameplate. You may select from a wide range of plates.

Business Name and Trade Mark Search and Registration

A simple name check will not guarantee your absolute 'ownership' of a name, nor protect you from possible 'passing off' claims against your chosen name.

National Business Register offers a thorough and comprehensive check of all Business Names, Company Names and Registered Trade Marks. Detailed information on choosing Business Names is also available.

National Business Register can also arrange to register your trading name, or any product name, as a Trade Mark on your behalf, and we strongly recommend Trade Mark searches.

Consumer Credit Act Search and Registration

If your company is in any way connected with transactions where customers are given time to pay (for example, if it sells on credit, hires or leases out goods, lends money, issues trading checks or credit cards, arranges credit for third parties, offers HP terms, collects debts, help others with debt problems or advises on the credit standing of individuals) you may need a Consumer Credit Act Licence from the Office of Fair Trading.

Every trading name licensed by the OFT must be different, and over 400,000 licences have been issued. If your Company is likely to need a CCA Licence, these names should be checked before registering a Company name. National Business Register will check this register for you, and apply for an OFT licence, if required, on your behalf.

INTERNATIONAL AND OFFSHORE COMPANIES

National Business Register also forms Offshore and International Companies for worldwide tax efficiency and trading. Ask for our International brochure.

An Offshore Company Network can be cost-effective at surprisingly low levels of turnover.

USEFUL ADDRESSES

National Business Register LLP
Somerset House
6070 Birmingham Business Park
B37 7BF
0121 678 9000

ACCOUNTANTS

Institute of Chartered Accountants
P.O. Box 433,
Moorgate Place,
London, EC2P 2BJ
020 7920 8100

The Chartered Association of Certified Accountants

Lincoln's Inn Fields,
London, WC2A 3EE
020 7242 6855 29

SOLICITORS

The Law Society
113 Chancery Lane,
London, WC2A 1PL
020 7242 1222

Further information on starting a business can be found at  Business Link - Guidance on setting up a new business