How to set up a limited company

What is a limited company?
Why set up a limited company?
When should I set up a limited company?
Can I set up a limited company on my own?
How to set up a limited company step by step
How much does it cost to set up a limited company?
How long does it take to set up a limited company?
When should I change from a sole trader to limited company?

What is a limited company?

A limited company can also be known as a corporation and it is one way of structuring and running a business. It is a legal entity that exists separately from its owners. There are many potential business benefits from setting up a limited company, including: lower tax rates, limited personal liability, and better brand definition.

By setting up a limited company, the owners or shareholders establish limited liability, and will typically only be liable for the company’s debts up to the amount they invested. This can be advantageous for business owners as it protects their personal finances.

Limited companies can enter into contracts, own assets, and conduct business under the limited company name. They are subject to specific regulations and reporting requirements, including filing financial statements and adhering to corporate governance standards.

This form of company can issue shares to raise capital and continue to exist regardless of changes in the limited company’s director, or the limited company’s shareholders.

Why set up a limited company?

If you’re trying to weigh up the benefits of being a sole trader vs a limited company, you should consider the several advantages for business owners that come from setting up a limited company. These include:

Limited liability

By setting up a limited company, business owners’ and shareholders’ personal assets are separated from the company’s accounts. This helps mitigate the personal financial risk for business owners and protects personal finances in the case of company debts.

Brand identity

Being registered as a sole trader ties the business to the business owner. Through setting up a limited company, the limited company director and shareholders can separate themselves from the brand. A limited company can establish its own reputation. Setting up a limited company can also help convey a professional and credible image.

Access to capital

By setting up a limited company, founders are able to sell shares in the business, which can raise capital through investment. This can help a business continue to scale and can be particularly attractive to growth-orientated businesses.

Employee benefits

If your business has a team of employees, setting up a limited company might be advantageous because of the benefits it can provide for your employees. This includes the easier establishment of pension schemes and stock options - which can help attract and retain talent.

There are administrative and legal responsibilities associated with setting up a limited company. It is also important to consider the costs of setting up a limited company and weighing up whether setting up a limited company is correct for your business at this stage.

Seeking professional advice or support from your bank may help you to make the right decision for your business.

When should I set up a limited company?

Deciding when it’s the right time to set up a limited company isn’t always easy, but there are ways to help you assess whether your business is at the right stage of its journey to benefit from limited company registration.

Reviewing your business goals can often provide a useful starting point when deciding. Businesses that aim towards growth, or those looking for investment, may suit establishment as a limited company.

On the other hand, sole traders looking to continue more localised business ventures based on their personal skill sets may find the time-consuming legal responsibilities associated with setting up a limited company outweigh the advantages.

Other considerations include your revenue stream and trading success. Businesses that can generate sustainable revenue are better suited to becoming a limited company because they are able to demonstrate the potential for growth.

The cost of setting up a limited company is another determining factor when deciding when to transition a business. These can include incorporation fees, ongoing administrative expenses, and potential legal and accounting fees.

Overall, the right time to set up a limited company in your business journey is typically when your business is financially stable, has growth potential, and you're ready to take on the associated administrative responsibilities.

Careful consideration of your business goals and individual circumstances will guide you in making this decision.

Can I set up a limited company on my own?

Yes, business owners can set up a limited company on their own. A limited company will be run by a limited company director. And, if you’re setting up a limited company on your own, you will likely be the only limited company shareholder.

How to set up a limited company step-by-step

1. Choose which type of limited company to set up
2. Choose your company name
3. Appoint at least one company director
4. Decide who will be your company’s shareholders
5. Confirm what records you need to keep as a limited company

1. Choose which type of limited company to set up

   There are two types of limited company: private and public. Choosing the right option for your business is the first step, as the decision will define the company’s ownership structure, share transferability, disclosure requirements and capital-raising abilities.

   Consider the business goals, longer-term vision, funding needs and ability to comply with regulatory requirements when deciding which type of limited company to set up.

   • What is a Private limited company?
     
     A private limited company is typically owned by a smaller group of shareholders that may include founders, a limited number of investors, and even friends or family.
     
     Private limited companies are not required to publicly disclose their financial information or ownership details; they are also subject to fewer regulatory requirements than public limited companies.
     
     This form of company can raise capital through issuing shares, typically to existing shareholders.

   • What is a Public limited company?
     
     A public limited company has freely transferable shares, and these can be owned by many investors, including the public. These companies are subject to strict regulation and must disclose financial and governance information publicly. They have greater access to capital and are better positioned for growth and expansion.

2. Choose your company name

   When setting up a limited company, choosing a limited company name is a weighty decision. It will represent your brand and identity.

   • What to consider when choosing a company name
     
     Founders may want to consider availability and uniqueness, by thoroughly researching their proposed limited company name online. Other considerations include relevancy to the business, scalability, cultural sensitivity, and long-term suitability.
     
     If you plan on expansion beyond your locale, it’s useful to check whether your company name has any different meanings or translations in different regions, and whether that can affect how people perceive the brand.

3. Appoint at least one company director

   Every limited company needs a company director. It’s important to make sure the director meets any legal requirements and that the director’s appointment is registered with Companies House.

   If you’re a single director business, our HSBC Kinetic Current Account* could be right for you. Find out what benefits are on offer, and then apply in-app in minutes today. For more complex everyday transactional banking, our Small Business Banking Account and Business Banking Account products could provide the additional requirements you need. Visit our business accounts page to compare your options.

4. Decide who will be your company shareholders

   Your shareholders can impact the direction of the business. It’s important to consider the optimum number of shareholders to suit the size of the business, the ownership percentages, and whether any external investors could become shareholders.

5. Confirm what records you need to keep as a limited company

   There are a number of limited company records that must be maintained to ensure compliance with legal and regulatory obligations. Business leaders should ensure they keep up to date with the required limited company records. Examples include, financial records such as annual accounts, shareholder records, statutory registers, and tax records.

How much does it cost to set up a limited company?

The cost of setting up a limited company in the UK can vary slightly depending on several different factors, but key limited company costs can include:

Costs and fees associated with setting up a limited company

• Basic incorporation fee

  This basic fee for setting up a limited company with Companies House will cover the registration of the company name and some basic details.

• Companies House fee

  This additional limited company cost is low and covers the processing of registration documents.

• Registered office address

  Every limited company is legally required to register a company office address. This can be the founder’s address, but some owners prefer privacy and use a registered office service instead for a small fee.

• VAT registration

  Any limited company expected to reach the VAT threshold will need to register for VAT. Registration is free but business owners might want to consider budgeting for the accounting and compliance costs associated with VAT.

• Accounting fees

  Consider the cost of hiring accounting services when setting up as a limited company. The legal and financial responsibilities can be more complex than those associated with a sole trader. An accountant is often a valuable expense in the long run, but accounting software can also provide useful support. It is also important to ensure you have the most appropriate business bank account for your company’s needs.

How long does it take to set up a limited company?

The timeframe can vary but online applications are typically fastest, and the processing time can be as short as one day.

You’ll need to provide three pieces of personal information about yourself and any shareholders, such as your national insurance number, passport number and telephone number. Paper applications will typically take longer; potentially up to a couple of weeks depending on postal and processing times.

When should I change from a sole trader to a limited company?

The right time to set up a limited company is dependent on your business goals, revenue streams and general financial stability. For many business owners, registration as a sole trader is an efficient way to run a business. However, when your business is ready to take the next step, HSBC UK can help support the financial needs of transitioning to a limited company.

*T&Cs and fees apply. Subject to application, eligibility and credit check.

The value of any tax benefits described depends on your individual circumstances. Tax rules may change in the future.