The question many ask is why set up a private limited company? This question is asked mainly because setting up a company is likely to involve more administration and higher costs then if you remain as a sole trader. The answer to this question concerns your personal financial liability. If you are sole trader and your business fails, you are personally responsible for all of the business’ debts. This means you are running the risk of personal bankruptcy if it is a large debt and you cannot afford to pay it. By setting up a limited company you are protecting yourself against this.
Because a limited company is a separate legal entity it is therefore responsible for its own actions. The finances of a private limited company are completely separate from those of the owner(s). To a certain extent being a limited company might make you seem more credible to potential investors, partners and customers.
So how do you go about setting up a company? Setting up a limited company will require you to register at Companies House. By paying a small fee you can arrange for an accountant, solicitor or agent to do this on your behalf. All you need to do is provide some basic information and a few signatures. There are ready made limited company names that can be purchased if you wish to do so. The alternative is to form a brand new limited company. If you wish to do this you need to send a memorandum of association, articles of association and a completed IN01 form to Companies House. A memorandum of association gives details of the company’s name, nature of business and registered office. This document must be signed by the director(s) and in front of a witness. The registered office of the company is the address where all correspondence from Companies House will be sent to. The articles of association will set out the rules for running the business and also the regulations. Companies House will not supply memorandum or articles and these can be purchased from a company-formation agent or a legal stationer.
A private limited company must have at least one director and they can also be a shareholder. If a person has been disqualified from acting as a limited company director, are an undischarged bankrupt or are less than 16 years old they cannot assume this role. Directors of limited companies are responsible for notifying Companies House of any changes to the structure and management of the company. Company directors are also employees of the company and must pay income tax and Class 1 National Insurance contributions.