The Law Shop is now closed. Please click here to find out more.

Legal requirements for setting up and running limited companies

A limited company is an organisation separate from the people who run it.

If you choose to run your business as a limited company, you will be creating an organisation which will be independent from you, and this organisation will be responsible for debts or loans taken on by the business. This can give you a layer of protection from any financial problems that the business has; if your business has debt problems or is sued, you will not be held financially responsible or be at risk of bankruptcy.

Limited companies also carry a certain level of prestige – you may find that potential clients are reluctant to work with sole traders, and will only work with a limited company.

However, setting up and running a limited company is more complicated than other types of business, such as sole traders and partnerships.

How to set up a limited company

If you are setting up a limited company, you will need to register the company with Companies House before you can begin trading.

You can register online at GOV.UK – registering your company online will cost £15. Alternatively, you can use government form IN01. You should post this to Companies House at the following address:

New Companies Section
Companies House
4 Abbey Orchard Street

If your company is based in Wales, Northern Ireland, or Scotland, you will need to send your application to a different address – you can find the relevant address at the Companies House website.

Registering by post costs £40, and takes 8-10 days, unless you use the Companies House same day service – this will cost £100. Applications must be received by 3pm to have the company registered on that day.

You will need to come up with a name for the company before registering - note that registering with Companies House does not protect your company's trademarks or other intellectual property. These will need to be registered with the Intellectual Property Office (IPO).

To register, you will need a name for the company and an address at which it will be based. You will also need to name at least one director and one shareholder.

Appointing directors

The director(s) will be responsible for running the company – you can name yourself a director if you are starting the business. A director must be aged 16 or over, and cannot have been disqualified from being a director in the past.

Directors must make decisions which will benefit the company rather than themselves, and they must notify shareholders if they could personally benefit from a transaction the company makes. They can also be held personally liable for the performance of the business, as well as any issues with the company’s records or accounts.

It is possible to name another company as a director of a company, provided that at least one of the other directors is a person.

All directors will have a registered name and address published by Companies House – the address does not need to be the address at which you live.

It is possible to have your address unpublished from the public register, but you will need to prove to Companies’ House that you and/or your family would be put in danger of violence or intimidation as a result of having it on there.

Appointing shareholders

The shareholders (sometimes known as “members” or “subscribers”) are the owners of the company. How much control they have of company and what they can get in return will depend on how many shares each shareholder has.

Shareholders can make money from the company in the form of dividends – these are payments to the shareholders that are made out of the profits that the business has made in the current and previous financial year.

Your limited company will need at least one shareholder, but there is no maximum on how many the company can have. Again, you can name yourself as a shareholder, and there is nothing to prevent the director being a shareholder.

Shareholders in the company will have certain rights, such as the right to vote on any proposed changes to the company. What those rights are must be specified in the statement of capital when the business is registered with Companies House.

As with directors, a company can become a shareholder of a company.

Other requirements for registering with Companies House

You will also need to draw up the following.

Memorandum of association

The memorandum of association is an agreement between all shareholders indicating that they are forming the company. It must be signed by all shareholders.

You can download a template memorandum of association from the Companies House website.

Statement of capital

This agreement specifies how many shares there are for the company and how they are shared out between the company’s shareholders (subscribers). The statement will need to include:

  • what type of shares there are
  • how much they are worth, and
  • names and addresses for each subscriber.

The statement of capital should also contain information on the rights of the shareholders, such as how many votes they get on company decisions and what share they get of any dividends.

This can vary, as your company may offer different classes (types) of share, which could grant different rights and bonuses.

The statement should also state the company’s share capital – the value of all of its shares added together.

Articles of association

These are the rules that shareholders, directors and the company secretary have to follow while running the company. You can have articles of association drawn up for your company, or you can use a model article downloaded from Companies House.

You should be very careful when getting your business incorporated – a small mistake could cause real problems later on. For example, the memorandum of association cannot be edited once the business is incorporated, so any errors could have unintended consequences later. You should get legal advice before submitting your application to Companies House.

Earning from a limited company

As a director of the business, you can earn a salary from the business, as well as expenses and benefits that other employees might be expected to earn. If you are also a shareholder, you could take a dividend from the company as well.

Taking a dividend without a salary is an option, but it is quite different to just taking a salary, and should be considered carefully.

For example, less tax is paid on dividends, meaning you can keep more of what is paid to you by the company. However, as dividends are based on how much profit is made by the company, your earnings are entirely dependent on the performance of the company – if the company doesn’t make any profit, you won’t be paid anything.

This is a very complex area, and you should seek dedicated legal advice.