How To Form A Limited Company

If you've been self-employed for a while, you may wonder what the next step on the path to becoming the next Coca Cola or Nike is. Although that stage is a long way off (and will remain so for most businesses), the next step to becoming a respectable household name is to form a limited company. Over the course of this article I will explore how to go about becoming a limited company and the benefits of doing so...

The Benefits of a Limited Company?

Of course, the formation of a limited company sounds a fantastic idea - it's a benchmark for how far your business has come and lends an air of legitimacy and respectability to all your future dealings. But behind these superficial reasons, there are also some obvious benefits to registering your business:

- The main advantage of the formation of a limited company is the limited liability status you are granted. This means that if the company goes into receivership the shareholders and officers' own assets are not at risk (provided you have always operated within the law!)

- Sole Traders and Partnerships pay tax on the first penny of profit they make. If you're a limited company, the first £10,000 of your profits is free from the taxman's grasp.

- Profits of the company can be paid as dividends to the shareholders. Currently national insurance is not applicable to dividend payments, reducing your taxes further...

- As suggested above, your customers and suppliers are likely to have more confidence in a limited company ahead of a non-limited business. You may find that more people are happy to deal with you, making it easier for your business to continue its growth.

- No two limited companies are allowed the same name, so registering is a good way of protecting your brand outside of your region.

- There is no obligation for a limited company to begin trading immediately, so forming one is considered a lot cost and simple way to protect a business name. This doesn't in itself give the right to use the name, but it's a good for companies who anticipate future developments well in advance.

How's it done?

So now that you know the benefits that a limited company is allowed, how exactly do you go about become one?

While there are a lot of websites offering to help with the process, the cheapest and most straightforward way to form a limited company is to deal with Companies House directly. For this, you will need:

- A memorandum of association. This outlines the company name, its registered offices and what it does.
- Articles of association. These establish the rules for carrying out the company's internal affairs.

On top of this, you will then need to fill out Form 10 (which provides details of directors, the secretary and the registered offices) and Form 12 (a statutory declaration of compliance with all legal requirements surrounding the limited company's incorporation.)

Companies Houses charges a standard fee of £20 to form a limited company, but also offers a premium service that offers same day incorporation for £50, which should be considered if the funds are available and time is a factor.

If all this sounds a bit of a hassle (and it really can be - mistakes are very easy to make in the process), there are simpler routes if you're willing to pay a premium. You can consult a lawyer or a business agreements specialist to ensure that the process is not delayed any more than necessary, although this will cost you. Alternatively, one of the quickest is to buy an "off the shelf" company from a company formation agent. This is one of the quickest routes, but expect to pay well over £100 for the privilege - although of course you can shop around. An off-the-shelf business will already have a registered company name, but you can change this easily to the business name of your choice.

And that's the process of formation for limited companies. There are reasons to stay self employed, but from a tax perspective the positives outweigh the negatives!