• 6 MIN READ
Incorporating a Company in the UK: A Step-by-Step Guide
February 9, 2023
You may have spent some time thinking over your business strategy and choosing the perfect jurisdiction for your company. If you are an aspiring entrepreneur or an ambitious startup, this would be a reasonable way to go. As a platform designed to help businesses grow easily, Payrow understands why you want to start your business in the UK. This is a country with clearly defined legal regulations, optimal taxation, and attractive social guarantees.
“Should I incorporate my business?” This is a common question we hear from those who want to start a business for the first time. Some just overlook this procedure, as they are not sure whether it is necessary to incorporate or not. But even if you have produced a rock-solid business plan and collected the startup capital, this does not mean that you have already become a business, at least officially. In this article, we explain UK company incorporation, including what you need to have on hand to create your limited company.
What Does It Mean to Incorporate Your Business?
Though you may find the term confusing, the definition is quite simple. Company incorporation is the process of registering your business as a limited company through Companies House. Company House is the official registrar of companies of the UK Government. It will provide you with a form that you need to fill in: you’ll specify the company name, core activities, a registration address, and other details.
What Type of Company Should I Incorporate?
Choosing the right business structure for your UK company may be a challenge, especially when you want to spend less on income tax, increase profits, and build the organisation’s credibility at the same time. The most popular business structures include sole traders, partnerships, limited liability partnerships (LLP) and limited companies. There are more types with complex ownership structures that you may find suitable.
To tell the truth, incorporation is not a legal requirement in the UK. If you find that being a sole proprietor is perfectly fine for you, then there’s nothing to worry about. But in some cases, for example, when you want to bring in co-ownership, you do need incorporation. The government website provides extensive and detailed guidance on how to register a company and choose a name for it, which will be relevant if you want to incorporate it.
So, do I have to incorporate my business? The UK law states the following:
- A business must be incorporated at Companies House to legally operate as a limited company. Incorporation involves registering the company with the government and obtaining a certificate of incorporation, which serves as official proof of the company’s existence.
- Sole proprietorships and partnerships do not need to be incorporated at Companies House and can operate without this. A sole proprietorship is a company owned and run by one person, while a partnership is owned by two or more people. These types of businesses do not have a separate legal identity from their owners.
- Other business structures, such as LPPs and LPs, can choose whether to be incorporated at Companies House, but it’s advisable to consult an accountant to determine the best course of action for the specific business. An accountant can help you assess the benefits and drawbacks of incorporation and help you navigate the process of registering your business if you choose to do so.
Why Should I Incorporate My Company?
There are several reasons why incorporating your company is a good idea. In short, incorporation allows you to limit personal liability and gives your business a professional image, helping you attract customers and investors. Let’s look at the main reasons in more detail.
Protection from Personal Liability
One of the most important benefits is the personal protection that incorporation offers. Before you incorporate, there is no legal division between you and your company. However, once you have taken this step, your business is considered a separate entity, which can provide significant protection to your personal assets in case of legal action. Your risk, as the name suggests, is limited.
For instance, if your company owes money to a creditor and is unable to pay, that creditor cannot come after your personal assets, such as your home, as the debt is solely the responsibility of the company and not the individual. As a shareholder, your liability is limited to the amount you have invested in the company through your shares.
Define the Rights & Obligations of the Founders from the Start
An often-underrated benefit of incorporating your business is the establishment of binding agreements and legal structures. This can be accomplished through creating articles of association and a shareholders’ agreement, which can only be officially established once your company has been incorporated.
By incorporating, you have the opportunity to define the rights and responsibilities of your business partners, whether they are co-founders, shareholders, or directors. This is particularly important if your business partners include friends or family members. Incorporation provides a framework for clearly defining these relationships and avoiding future conflicts.
Approach Investors to Fundraise
Many startups rely on venture capital and fundraising to secure financing and gain the funds they need to grow. However, this can only be achieved if the company officially exists. When fundraising, investors provide capital in exchange for either current or future ownership of shares in the company. Without incorporation, there are no shares to offer, making it impossible to secure investment through these means.
When Should I Incorporate My Startup?
The timing of when to incorporate your startup depends on various factors, including your business needs, goals, and the industry you are in. There are several advantages to incorporating your company at its early stages. They include taxation, liability, and fundraising.
Here are some key considerations:
- If you have a solid business plan and model in place, you may be ready to incorporate earlier.
- If you plan on seeking investment capital, incorporating early can make it easier to raise funds.
- If you need to establish a legal structure for your business, incorporating sooner rather than later can help ensure everything is in order.
- If you need to create a clear company culture, which can be important in attracting employees and partners, incorporating can help.
Returning to the question: When should I incorporate my company? The decision of when to incorporate should be based on your specific needs and goals for your business. It’s recommended to consult with a lawyer or accountant to determine the best timing for your startup.
How Should I Incorporate a Company?
The process of incorporating a company can vary depending on the jurisdiction (England, Scotland, Wales, or Northern Ireland), but here is a general outline of the steps involved:
Propose a Name
Decide on a name for your company that is unique and not already taken by any other business. Your company needs a name that really captures the essence of your business. It’s up to you whether to be literal or metaphorical.
There are a few restrictions you need to be aware of:
- Any name that links your business to an official body, the monarchy, or a charity must be approved in advance.
- Hate speech, insults, and aggressive discrimination are forbidden.
Follow the Required Procedures
Register the company at Companies House. Complete all the necessary registration forms. Obtain the required licences and permits – depending on your industry; you may need to obtain certain licences before you can legally conduct business. At this step, you could also establish the rules and regulations for your company’s internal management, such as how directors will be elected and how meetings will be conducted.
Name Core Business Activity
To categorise the primary operations of a business, Companies House employs the Standard Industrial Classification (SIC) code. This is a code that consists of a sequence of five numbers, uniquely defining a specific economic activity. During the registration process, you must specify at least one SIC code to describe the nature of your company’s business. If your operations are diverse or complex, you may use up to four SIC codes.
Specify the Place of Registration
Your company must have official headquarters, which can be located anywhere within your selected jurisdiction (England and Wales, Scotland, or Northern Ireland). However, it must be a tangible, occupied building and cannot be a PO box.
Choose a physical location for your company’s registered office and notify the relevant authorities. It’s important to note that this address does not necessarily have to be your place of work. It can be the address of your consultant, accountant, or any other representative.
Provide Company “Officer” Details
The government considers a director, manager, or secretary of a company to be an “officer.” These individuals are responsible for managing or owning the company, and Companies House requires information about them. If things change, you can alter their details.
Mention Company Directors & People with Significant Control
Your company is considered a distinct legal entity, but it must have a designated representative known as a company director. The director is responsible for overseeing the business operations. There must be at least one director; however, it’s possible to have more. Directors can be foreigners or reside overseas.
A person with significant control (PSC) refers to an individual who holds ownership or influence over a company. They are also referred to as “beneficial owners.” Upon incorporating a company, it is necessary to inform Companies House of your PSCs. If this information changes in the future, Companies House must be notified as well.
Specify the Details of the Shareholders
The owner(s) of a business is referred to as a shareholder, which is distinct from a director (as not all directors are shareholders and vice versa). However, one can be both a shareholder and a director. Before you incorporate the business, it is important to identify the shareholders involved.
How Do I Decide How Many Shares to Issue when Incorporating?
The number of shares to be issued when incorporating a company depends on several factors, such as the type of company, the capital structure, and the business plan. Typically, the initial shareholders agree on the total number of shares to be issued, which could range from a few hundred to millions, and then determine the value of each share. The number of shares can also be adjusted in the future if necessary. It’s important to consult with a legal or financial expert for guidance on the appropriate number of shares to issue.
Create a Memorandum and Articles of Association
The articles of association outline the basic principles that govern a business, including the directors’ responsibilities, procedures for the appointment and removal of directors, and protocols for conducting and documenting meetings.
These articles serve as a fundamental basis for the limited company, both legally and operationally. The UK government provides model articles; you can find a memorandum template on the official website. But if a more tailored solution is desired, it’s recommended to seek advice from a professional.
Learn More About Payrow Services for Your Business
At Payrow, we know almost all the problems faced by startups, and, more importantly, we know how to handle them. If the registration process is something you need to do on your own (filling in official forms and providing personal data is required), then management and accounting are the spheres we know perfectly well. Still, if you have any questions regarding business incorporation, you can contact us and request a consultation.
Payrow provides financial services to small and medium-sized enterprises (SMEs) and startups in the UK. We assist startups in effectively planning and analysing their financial flow and tracking expenses through the use of cutting-edge digital tools that cover all financial aspects. Being a startup as well, Payrow knows the various challenges our clients may face. We recognise the significance of secure finances and sound management. Our team is available to address all your queries regarding invoice creation, payment processing, and tax payment.