UK Company Formation: 15 Do’s and Don’Ts to Be Aware Of

Starting and running a company in the UK can be rewarding. However, before your excitement hits the roof, there are legal obligations every business owner must adhere to. Whether you’re a seasoned entrepreneur or a novice starting off the journey of a company director, there are some UK company formation dos and don'ts you need to be aware of.

Understanding the dos and don’ts of company formation in the UK is crucial for your business’ success.

Besides your business idea and a business plan, you must incorporate or register your company under set regulations in the UK.

The UK registrar body responsible for registering businesses is known as Companies House. We have created this post to help you get a grasp of what it means to incorporate your business, enlighten you on UK company formation, the process to follow, and the obligations you must fulfil when setting up a limited company.

After completing the company formation process, you also need to understand the process of reporting, what to report, and when to report.

What is UK Company Formation?

Company formation is the process of registering a company in the UK. The UK registrar body, Companies House, is the official body that registers or incorporates companies.

But what is incorporation? Incorporating a company means registering a business to make a legal entity. Then again, what is a legal entity? A legal entity means the law recognises a limited company as an individual. Whatever happens with the business is separate from you. It can make decisions and own property. As a separate entity, a limited company protects you from any liabilities or debts if the business is unsuccessful.

Incorporating your business into a limited company drives a legal wedge between the company and yourself for:

1. Shared finances
2. Liabilities
3. Contractual agreements
4. Property ownership
5. Tax

As the business owner, the only direct link between you and the limited company is the value of the nominal shares. In case of any liability or debt, you‘re only liable up to the value of your shares and your finances are not affected. This protection is what is known as ‘limited liability.’

Limited Company By Shares or Guarantee

Limited companies can be limited by shares or limited by guarantee, but shares limit the vast majority of private companies. Companies limited by shares are set up to make profits, while those limited by guarantee are mostly charity organisations.

Incorporating a company is not mandatory in the UK, meaning you can operate a business as a sole proprietor or an unregistered entity. In this case, the business and yourself are the same before the law. Hence, if anything goes wrong, you are liable for the debts, leaving your assets and finances at risk and can be used to settle the debts.

For this reason, many people decide to incorporate a business into a limited company to avoid going down this route of risking personal finances or assets. There are two ways to register a company in the UK: online and on paper, and each method has its Dos and Don’ts.

The Dos and Don’ts of Company Formation To Be Aware Of

As you prepare to start a new business in the UK, company formation comes before you shop for furniture, office designs, or react to your eCommerce store.

As you approach company formation or incorporation, you need to be aware of the dos and don’ts of UK company formation. Let’s begin with the DOs.

1. Determine Your Goals

What are you hoping to achieve? Are you launching a new business or setting up a new office or a subsidiary for your business? Outlining your objectives will help you achieve your goals if you put in the effort and have a budget and a timeline.

Carrying out research and understanding your market and potential competition are important to make informed decisions. Before you decide on the business you want to venture into, identify a problem you’d want to solve, then offer a viable solution. If your business is already existing, this step isn’t necessary, as you already have traction in the industry.

2. Choose the Right Business Structure

Before you think of registering a business at Companies House, you need to decide which business structure is good for you. A limited company protects the business owners from liability while providing them with tax advantages. To have a legal understanding, consult a legal expert in the industry to help you navigate the process of incorporation. Here are the common business structures in the UK to choose from:

2a) Sole proprietorship (sole trader)

A sole trader is a common type of business structure and is owned by one person. It’s easy to start a sole trading business because less paperwork is needed, legal requirements, and low startup costs. The business and you are the same entity before the law. So, what are the benefits and downsides of a sole proprietorship?

Pros:

• Easy to and fast to start
• Less paperwork and administrative roles
• Low startup costs

Cons:

• Personal finances are at risk when the business is in debt.
• The more profits you make, the higher the taxes.

2b) Partnership

When more than one person joins to start and run a business, we call it a partnership. They share responsibilities, make decisions on how to run the business, and share profits and losses. Here’s why you should consider opening a partnership business:

Pros:

• Support from partners and shared liability
• Easy to set up
• Fewer responsibilities

Cons:

• Prone to disagreements and opinion fallouts
• Personal opinions don’t matter as much.

2c) Limited Liability Company (LLC)

The company is a legal structure before the law; it can be limited by shares or limited by guarantee. The business and the people who run it are separate before the law, meaning any liabilities the company faces don’t affect its assets. An LLC must file for returns at Companies House and pay corporate tax.

Pros:

• Business owners aren’t liable for the company’s financial problems
• Held in higher standards and can attract investors easily
• The LLC can enter differently into other partnerships
• More tax efficient

Cons:

• Company information is accessible to the public.
• More responsibilities

2d) Limited Liability Partnerships (LLP)

Two or more individuals or entities can set up an LLP. Every entity is entitled to profits, and a liability limited to the amount they invest in the business.

Pros:

• Business and personal are separate
• Investors are only liable to
• Tax is lower than in sole trading business

Cons:

• The company's details are on the public register
• Administrative costs are high
• More administrative responsibilities
• Profits must be allocated annually to members when realised

3. Register an Office

Companies House requires that every registered business must have a registered office address. A registered address is where the registrar will send official correspondence. The requirement applies even to businesses that offer virtual services.

Avoid giving your residential address as your registered office address, as it will be published on public records. However, you can lease an office, warehouse, or shop, depending on your company's needs. If you can’t do so, you can get a virtual office service and provide it as your registered office address.

4. Conduct Elections (Shareholders, PSCs, members)

A limited company or partnership is different from a sole proprietorship in how the businesses are run. An LLC or partnership must have a board of directors, which can comprise family members, strangers, or friends, but they must be elected.

Whoever is elected as company director must be of legal age because they’ll be part of the people making important decisions for the company. Company directors are responsible for keeping accurate company records, but if they’re unable to do so, a corporate secretary can help with the vital documents.

The secretary is also responsible for writing minutes of these elections, including the unanimous vote to register the business as a company.

5. Register Your Company

If you decide to operate a limited company, you must register the business at Companies House, the body responsible for registering companies. Failure to register your business at Companies House can result in legal implications. In the process of incorporation, you must present all necessary documents that the Companies House requires for incorporation.

6. Protect Your Business Idea (Intellectual Property)

Depending on the nature of your business, some limited companies need protection, especially those dealing with branding, unique products, or services. Why protect an idea? Protecting your unique business idea is crucial to prevent people from stealing the idea, which is your Intellectual property (IP).

So, how do you protect your intellectual property? You can register a trademark, copyrights, and patents to protect your company’s assets against competitor infringement. Moreover, you can conduct regular monitoring to ensure your competitors don’t infringe and to minimise the impact it may have on your business.

7. Choose a Unique Company Name

During the incorporation process, you must choose an official company name for your new business. There are some rules to adhere to when choosing a company name, such as making sure the name is unique and not similar to any other existing business.

But how do you ensure your business name is unique? You can check if your company name is unique or available in numerous ways; Use a company name search tool or the Companies House webcheck page. Here are some basic rules for choosing a company name:

1. The name can’t be the same or similar to an existing company name
2. The name shouldn’t be similar to another registered company
3. You can use a dissolved company name
4. Using upper and lower cases in your company name doesn’t distinguish it from an existing company
5. Using Reserved or Sensitive words needs justification from the relevant body
6. Your company name must have the suffix "limited".
7. The name must not contain offensive expressions, such as abusive or illegal words.

8. Articles of Association

The articles of association is a document that guides your company operations. It’s like a constitution of the rules that govern your company. Companies House will generate a memorandum as part of the registration process, and then you can attach it to the articles you bring.

Articles of association outline the following:

1. Company relationships between the company, directors, and members
2. Share issuance and transfer
3. Decision making
4. The approach to appointing and removing directors
5. Director responsibilities and rights
6. Distribution of dividends

Those who use company formation agencies will have articles drafted for them, so there’s no need to bring others.

9. Share Structure

If shares limit the company you’re forming, you must decide how many shares you’ll issue. A company limited by shares must at least share one share.

Share structure determines how many shares are owned by each member.

For instance, in a sole proprietorship, you issue one share to yourself, meaning you own the company 100%. If two people own the company, you can issue two shares where each member owns 50% of the company.

Once the shares are issued, the nominal value of the total shares you own is equivalent to your financial liability in the company. Most share value is set at £1 per share, and the more shares you own, the higher your liability to company debts.

10. Standard Industrial Classification (SIC) Code

The UK government uses a SIC code to identify your business based on the industry in which your business is operating. Your four SIC codes will describe your business activity or activities.

11. Submit your Company Application Form to Companies House

When all areas of your company registration form are properly filled, you pay the relevant fee and then submit it to Companies House for verification. Before submitting your application to Companies House, be sure to crosscheck the form to ensure it’s filled with accurate information.

When the registrar is satisfied with the information you’ve provided, your application will be approved within 24 hours. Once Companies House approves your application form, they’ll send you company formation documents that include:

1. Certificate of Incorporation
2. Memorandum and articles of association
3. Shares certificate for each shareholder

However, if there are mistakes, the form is sent back to you for correction, and then you can resubmit for verification. For people who use a formation agency to incorporate their company, the agency will be informed of any errors, and they’ll correct them for you. When the process is complete, they’ll contact you to collect your incorporation documents. At this point, your limited company is legal, and you can start trading with your new UK limited company.

12. Register for Taxes with HMRC

Once your company becomes a legal entity and starts trading, you must register with HMRC to be able to pay business taxes. His Majesty’s Revenue and Customs (HMRC) is the UK regulatory body that regulates taxes. These taxes include:

1. Corporation Tax
2. Value Added Tax (VAT)
3. Pay As You Earn (PAYE)

Additionally, your company directors must register for self-assessment to enable them to report and pay taxes on untaxed income. So, how will your company fulfil filing and reporting obligations? As long as your business exists and operates under the UK law, the following obligations must be fulfilled:

1. Annual confirmation statement
2. Organising annual accounts for Companies House
3. Remitting Company Tax Returns and accounts to HMRC
4. Paying Corporation Tax and VAT (where applicable)
5. Annual Self Assessment tax returns to report your income from the business
6. Reporting details of every change to Companies House and HMRC
7. Ensuring all statutory company registers are up to date

The Don’ts of UK Company Formation

Registering your company may sound daunting if you're a new business owner. It doesn’t have to be, but it can get complicated when you make the wrong decisions. Some of the DON’TS to steer clear of include overlooking detailing, typos, or negligence.

These mistakes can result in penalties, legal issues, or jail, especially when the mistakes are constant. Here are the mistakes to avoid during company formation

1. Don’t Rush the Process

People register businesses for various reasons. Some incorporate businesses to open avenues to access loans, grants, or tax benefits.

If you’re forming a company for the wrong reasons, it’s easy to rush through the process of trying to achieve your goals. However, registering your business for the wrong reasons can lead to business stagnation or closure for failing to comply with the law.

Before you start the formation process, understand what you need and what you’re capable of, and then choose a structure that suits your budget and projection.

2. Ignoring the Companies House Public Register

Understanding the Companies House public register is vital for any business owner who operates in the UK. After formation, some of the information you provide to Companies House will be published on the public register. WHY? Transparency is important for limited companies, and that’s the reason for putting information in the public register.

The registrar publishes some company information on the public register including the details of directors and shareholders. Here are details of the information Companies House will publish on the public register:

1. Company name
2. Registered office address where official business mail is delivered
3. Business activities identified with SIC code
4. Director’s details - name, date of birth, service address, nationality and occupation
5. Shareholder’s details - name, shared information, and shared information

Since the addresses you provide are published on the public record, there might be better options than using a residential address as the registered office address. Companies House allows it, using your home address as a service address, the registered office, and shareholder address, as it may make you vulnerable to fraud and unwanted visitors.

Even though you work from home, don’t give your home address as the registered office address. But how do you avoid this mistake? Use an alternative address where your official mail will be delivered. The address must be at a physical location and also accessible to other directors.

3. Failure to Comply with Regulations

Rules and regulations are in place for a reason, including the process of company registration. Formation regulations vary depending on the jurisdiction in which you’re registering your company, and the registrar demands that you comply with them to the T.

A small detail can ensure your registration and allow you to conduct business in that locality. Invalid filing can also cause you problems. For instance, if you're registering a limited liability company but fail to present all relevant documents.

Company registration requires you to produce meeting minutes, a list of directors, share certificates, a unique company name, proof of address, and articles of association.

4. Ignoring Professional Support

Sometimes, it’s advisable to keep whatever you do to yourself, but not always, especially if you’re dealing with a process like company formation.

However, as you go register your business, talking to a formations lawyer or consulting with a formations agent will help you do things as expected. Don’t be shy to contact any professional you might need in the process to ensure you make the right steps and provide the right documents.

5. Complicating the Share Structure Unnecessarily

After adding shareholders and allocating shares, the shareholder can choose the following:

1. Number of shares they wish to hold
2. Price of the shares
3. Currency of the shares
4. Shares particulars like voting rights

A shareholder is liable for a company’s liabilities up to the value of the shares they hold. The higher the value of your shares, the more liable you are when the company faces financial difficulties. However, your assets and finances are untouchable.

When starting your business, use the basic share structure provided by Companies House with a minimal value of up to £1 each. Even for companies with multiple shareholders who hold different percentages of the shares, it can still be represented with a small share capital. Adding shares to your company is easier than removing unwanted shares.

6. Inconsistency with Information

A small typo can halt your incorporation process. What seems like a minor error in your eyes can be enormous on formal documents. Missing your company name or inconsistent information about objectives, members, and shares can hinder the entire registration process.

Before submission, double-check every detail on each form to ensure it’s consistent in all documents and forms. Pay extra attention to the company articles of association, provided addresses, and minutes. Providing the wrong address will send official correspondence from Companies House to the wrong location, not to mention the bank and other stakeholders.

Misquoting a clause in the articles of association means a misinterpretation, and the mistake can cost you dearly.

7. Ineligible Directors

Company directors are responsible for running, supervising, and making decisions about the business. They’re at the helm of business functions and key stakeholders who greatly impact the success of your business. Unfortunately, making the costly mistake of appointing ineligible people as company directors.

Only people of legal age (16 years and above) can become company directors, and once they assume the position, maintaining a clean record is a must. If someone is convicted of criminal activity like business-related fraud, they’re ineligible to serve as a director.

Another deal breaker for a company director is bankruptcy. Before submitting documents to Companies House, check their website for factors that can make someone ineligible to become a company director.

Why Register a Company in the UK?

Why start a business in the UK? The UK offers an unmatched, stable and business-friendly environment for all businesses. Whether you’re a resident or foreigner, the UK business environment is like a melting pot of cultures, opportunities, and ideas, making it vibrant for starting and growing a thriving business. Here are more reasons as to why you should consider doing business in the UK.

1. Setting Up a Business is Easy. The process of company Formation in the UK is straightforward. Whether you live abroad or within the UK, you can set up a business online and start trading in hours if you have all the required documents in place.
2. Business Legal Structures. There are numerous legal business structures you can choose from, the most popular being sole traders, limited liability companies, and partnerships. Each structure is different and has a unique set of implications for taxation, liability, and control.
3. Tax Implications. Tax systems in the UK are streamlined to accommodate small businesses. Companies pay for Corporation Tax in the UK, which is a single rate on all profits. Besides, the UK also offers numerous tax reliefs and incentives to startups like the Seed Enterprise Investment Scheme (SEIS).
4. Exposure to Talent and Markets. The UK boasts a highly skilled workforce and large consumer markets across industries. Thanks to its location, doing business in the UK provides unique advantages to businesses, such as being closer to European and Commonwealth markets. Anyone who wants to expand their business to international grounds will find this significant advantage a boon for business. For businesses looking to expand internationally.
5. Regulatory Environment. The regulatory environment in the UK is highly supportive of startups and other businesses. Incentives like “Start Up Loans” and grants make the process of starting a business easier, which is why new businesses get off the ground running.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

Frequently Asked Questions

What is the general UK law for company formation?

The general law on UK company formation is that people can only register a company for a lawful reason and provide a memorandum of association. A public company must have at least two shareholders with a minimum value of £1 each.

Can a non-resident register a business in the UK?

A foreigner can form a UK company as long as they provide all necessary documents to the registrar, Companies House. Alternatively, you can use a virtual address, a family member’s address, or a friend’s address as your registered office address for correspondence.

Can I get a UK visa if I own a business in the UK?

You can get a UK visa if you own a business in the UK under Skilled Worker visa sponsorship. A business registered in the UK can apply for a permit to sponsor foreign workers.

In Summary

Company formation in the UK is a straightforward process for any business owner. Incorporating a company in the UK is the ultimate decision to run a credible business that’s compliant with the law.

UK-registered companies are legitimate, reliable, and trustworthy as long as you follow the due process of incorporation. During the UK Formation process, there are mistakes you can make that can hinder the registration process. However, knowing what to do and what not to do can help you register a business successfully.

Running a business in the UK gives you access to a pool of skill and talent, not to mention a rich market of opportunities to build a thriving business empire.

Remember, a successful startup only begins at formation. Your vision, strategic planning, compliance with regulations, and steady pursuit of excellence will help grow the business. Each step discussed in this guide is either something you should do while others are mistakes to avoid. To support sustainable growth in your limited company, make sure you understand the provisions of Companies House on company incorporation. Remember, the business landscape in the UK is dynamic, and the entrepreneurship journey is a continuous learning experience. If you have any questions about company formation in the UK, kindly contact one of our experts here.