There are many widely-held misconceptions about UK company formation. We know this because of our years dedicated to providing incorporation and company secretarial services.
Much of these commonly held beliefs are simply not true. What’s more, they discourage new and existing businesses from incorporating and benefiting from the many advantages of trading as a limited company.
In this blog, we cut through the fiction and get to the truth concerning company formation in the UK.
It costs too much to form a limited company
In the past, it was expensive to set up a limited company in the UK. In 1975, for example, the cost of company formation was £50.00, which is equivalent to approximately £450 in 2022 – and around the same as a weekly wage.
In the UK today, you can register a limited company for less than £12. However, please bear in mind your company will need a registered office address.
If you don’t want to use your home address for this purpose, you can invest a little more and also protect the privacy of your home by using a virtual registered office and service address – see our Privacy Package costing £19.99.
It takes a long time to register a company
The time required to register a company in the UK ranges from a few hours to over a week, depending on which method of incorporation you choose.
Online registration through a company formation agent takes the least amount of time – the application form takes around 5 minutes to complete, and most companies are registered and ready-to-trade within 3-6 working hours.
At the other end of the scale, Companies House postal applications take 8-10 working days to process and the chances of rejection are considerably more than with online applications.
You need an accountant to form a limited company
In the past, most people used an accountant or a solicitor to set up a limited company. Thanks to the advancement of technology, company formation is now much quicker, easier, and affordable.
Today, the vast majority of people set up their own companies online using a company formation agent or the Companies House website.
You can certainly use an accountant to set up a limited company, but it will cost more – usually around £250.00.
It is better to issue a lot of shares
Every share has a nominal value, which represents a shareholder’s personal liability for company debts. Therefore, the more shares that a company issues, the higher the financial liability of its shareholders.
A company that is set up with just one shareholder and one director need only issue one share. There is no real benefit to issuing more shares than you need, unless you’re planning to sell them in exchange for investment, or a higher quantity makes it easier to apportion ownership between multiple shareholders.
If you are at all unsure about the share structure of your company, it is important to speak to an accountant.
The value of shares issued reflects the size of a company
The nominal value of shares that a company issues during and after incorporation does not reflect the size of the business. This ‘nominal’ value simply reflects the limit of the shareholders’ liability for company debts.
For example: if a company issues 100 shares with a nominal value of £1 each, the total personal liability of the company’s shareholders is £100.
The true value and size of the company, however, will usually be completely different.
A huge company worth millions of pounds may have just one or two shares that are owned by one or two individuals. Whereas, a tiny startup which has yet to make a profit could have 1000 shares split between 100 shareholders.
Shares need to be paid for – at the time of incorporation
It is not always the case that shares need to be paid at the time of company formation. It depends entirely on what is stipulated in the company’s articles of association and/or shareholders’ agreement.
Under the ‘model articles’, which the vast majority of private companies adopt, shares issued at time of incorporation do not require being paid. However, all shares allotted thereafter, require being paid in full at the time of issue.
If a company wishes to include different provisions for the payment of company shares, it must alter the model articles, create bespoke articles, and/or draw up a shareholders’ agreement.
Shares can only be issued in British Pounds Sterling (GBP)
Most UK companies, especially small ones, issue shares in British Pounds Sterling. However, companies are permitted to issue shares in any denomination or currency.
This may be beneficial or necessary for one or more share classes if a company carries out significant trading activities in a different country or has major investors in non-UK countries.
Anyone can register a company
There are very few bureaucratic barriers to registering a company in the UK, which is of great benefit to many small business owners, entrepreneurs, and the economy as a whole.
Most people can register a company in the UK; however, you cannot do so if you are:
There are no statutory restrictions relating to residency or nationality, which means that non-UK residents are permitted to set up and run a UK limited company.
You need at least two people to form a limited company
You need at least two shareholders (and a company secretary) to form a public limited company (PLC), but only one shareholder is required to form a private limited company (LTD) in the UK.
In fact, the same person can be the sole director and sole shareholder, allowing just one individual to set up a company, have full ownership and control of the business, and receive 100% of any profits.
This is a suitable and popular set-up for all types of small businesses, including startups, entrepreneurs, sole traders, and self-employed persons.
You need at least one UK-resident to set up a UK company
Not true! You can incorporate a UK company without a UK-resident director or shareholder.
Regardless of nationality or country of residence, one person can set up and run a UK limited company from anywhere in the world. However, they require being at least 16 years old, not an undischarged bankrupt or disqualified director.
They also need to maintain a registered office address in the same UK country as incorporation.
Directors have to be shareholders and vice versa
Whilst it is commonplace for directors of a company to also be shareholders in the business, it is not a legal requirement. Directors can simply be appointed by shareholders to manage a company on their behalf. In such cases, the directors act as agents of the company.
Shareholders are the owners of a company. There is no legal requirement for shareholders in a company to also be directors, but it is quite common for the same person or persons to hold both positions.
As such, shareholders may choose to appoint themselves as directors and run the company themselves.
You can register a company using any name
If this were the case, we’d have some questionable company names on the go! There would also be a great deal of confusion and many corporate disputes due to multiple businesses sharing identical company names.
Thankfully, Companies House imposes very strict, yet sensible rules and regulations. As a result, you can only register a company name that:
- is not the same as another registered company’s name
- is not too similar to the name of another company
- is not offensive
- does not contain a ‘sensitive’ word or expression
- does not suggest a connection with the Royal family, government, or any local authority
Check out the GOV.UK website for more information on incorporation and names.
Registering your company name provides trademark protection
Registering your company at Companies House does not provide any rights or protection other than preventing another company from incorporating under the same name.
Your company name will not have trademark protection unless you register it as a trademark. Furthermore, the availability of a company name does not mean that it is not a registered trademark.
You need to provide your own articles of association
There is no need to provide your own articles of association when you register a limited company in the UK. Standard articles, based on the Companies House ‘model articles’ will be provided by your company formation agent. These are suitable for the vast majority of UK limited companies.
Should these default articles not meet the needs of your new company, for example, if you need to issue more than one class of share or include pre-emption rights, it is possible to amend the articles accordingly or create bespoke articles. In such cases, professional advice is recommended.
You have to define your business activity and not deviate from it
When you register a company at Companies House, you need to choose a specific Standard Industrial Classification (SIC) code to describe the nature of your business, i.e., what your company does; the services it provides and/or the products it sells.
One SIC code is usually sufficient for most companies. However, you can select up to four, if necessary.
If your business activities change, you can simply choose a new SIC code or additional codes. Your company is not restricted to the original SIC code(s) selected.