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10 Things to Avoid When Forming a Limited Company

The process of setting up a limited company is so incredibly easy. It can be done online in a matter of minutes, and most company formations are approved by Companies House on the very same day. However, before you submit your application, you need to make some important decisions, have a clear understanding of what you want to achieve, and pay attention to detail. That way, you will get off to a flying start and avoid the 10 most common mistakes made by many first-time entrepreneurs.

Limited company formation

1. Forming the wrong company structure

If you want to make a living from your business, you should register a private company limited by shares. This means you will own shares in the company and have the right to a portion of whatever profit the business makes.

If you plan to operate for non-profit or charitable purposes, you should set up a private company limited by guarantee. There will be no share capital so you will not keep surplus income for yourself. All profit will be reinvested in the business or put towards furthering the aims of the company.

2. Registering in the wrong part of the UK

Limited companies are not registered in the United Kingdom as a whole. You must choose one jurisdiction in which to form your company – England and Wales, Scotland or Northern Ireland. You can still base your operations wherever you like, but your company will forever be registered in the jurisdiction you choose at the time of incorporation. This will also dictate the location of your official company address, which is known as a ‘registered office’. It must always remain in the country of incorporation.

3. Choosing an unsuitable company name

This part of the company formation process causes the most stress for many first-time entrepreneurs! Try to come up with a name that captures the values and purpose of your company. Something memorable, simple and appropriate. Don’t rush this stage.

Do not choose a company name that:

  • Is exactly the same as (or really similar to) another company name.
  • Falsely suggests a connection with the government, Royal family or a local authority.
  • Includes ‘sensitive’ words or expressions that you do not have permission to use.
  • Could cause offence.
  • Could be misinterpreted in another language or country.

Restricts future growth by pigeon-holing the business or the products/services you sell.

4. Failing to check the availability of your company name

Company names must be distinctive, so you will not be allowed to register a company name if there is another company on the register with the same name, or a name that closely resembles it. When you have decided on a name, check it immediately before getting your hopes up. Just pop over to Companies House WebCHeck and type in a name to find out if it’s available.

5. Failing to check the availability of your domain name

You will need to register a domain name to use as your website address and for business email addresses. It should be the same as your company name, otherwise people will struggle to find your business online. Check whether or not your company name is available to purchase as a domain before setting up your company.

Shareholder meeting

6. Not understanding the difference between a director and shareholder

A director manages the company. A shareholder owns the company. If you do not want a director to own part of the company, do not issue him or her with share capital. If you do, he or she will be entitled to a portion of the profits.

7. Issuing too many or too few shares

Shares determine the proportion of the business owned by each shareholder, thus how much profit they are entitled to. Share also dictate the financial liability of the shareholders.

The more shares you issue, the higher the liability of the shareholders if anything goes wrong. On the other hand, if you issue too few shares, you will have to create more if you want to bring in investors in the future.

8. Application form errors

It’s amazing how many applications are rejected and unnecessarily delayed because they’re not checked before submission. Take an extra few minutes to:

  • Review the spelling of your company name and the names and details of directors and shareholders.
  • Make sure the location of your registered office matches your jurisdiction of incorporation.
  • Indicate that you’d like to adopt model articles, or upload bespoke articles if you are not adopting the model version.
  • Confirm the officers’ consent to act.

Issued the correct number, quantity and value of shares.

9. Thinking you can ‘avoid’ tax

You cannot avoid paying tax by setting up a limited company. You will still have to pay 20% Corporation Tax, and you will have to pay personal tax and National Insurance on your salary and dividend payments above a certain amount. It is a tax-efficient business structure, but it’s not a way to dodge the taxman.

10. Being unaware of your legal duties

Company directors have many important duties, so please be aware of your responsibilities and keep on top of your filing and reporting obligations.

You will need to complete annual accounts, an annual confirmation statement and tax returns every year. Directors must be registered for Self-Assessment and complete annual tax returns.

You will also have to register as an employer and run payroll to be able to pay yourself and your employees.

If any details about your company change, including information about directors and shareholders, you must tell Companies House.

About author

Rachel Craig
Rachel Craig 1 posts

Rachel Craig is the senior content writer and editor for Quality Formations, the leading company formation agency in the UK. An expert in her field, Rachel provides in-depth guidance and advice on UK company registration, corporate compliance and starting a new business.

Prior to joining Quality Formations, Rachel worked in research and customer service after obtaining a BA Marketing and an MA History of Art from the University of Glasgow. In her spare time, she enjoys cooking, painting and spending time with her partner and their two untrainable dogs.

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