By Jonathan London on 5th June 2015

Options for setting up a new business

For many entrepreneurs, there will come a time in their career when they will need to weigh up the pros and cons of continuing as a sole trader, or setting up a limited company.

Freelancers often relish the freedom and flexibility that comes from being self-employed, independent and largely free of a formalised business structure around them, but for others, there are practical benefits to the private limited company setup that are too attractive to ignore.

Before making a decision like this, it is important for contractors to carefully consider the ins and outs of the limited company structure, examine what it entails and figure out from there whether it is the right way forward for their business and personal needs.

Why operate through a limited company?
The main reasons for establishing your business as a limited company pertain to legal and financial considerations.

Limited companies exist as separate legal entities from their founders and shareholders, meaning it can be considered responsible for its own actions and fiscal obligations in the eyes of the law. For sole traders, one of the biggest risks is the fact that the collapse of a business will leave them personally liable for any debts accrued; by contrast, a limited company’s finances are separate from those of their owners.

Although the administrative costs and burdens are higher when setting up a formalised company structure in this way, the added protection this provides is often well worth the trade-off. Many businesses often find that establishing themselves as a limited company makes them more credible to potential customers or investors, which should also be considered carefully.

How to set up a limited company
The first point to consider when taking the plunge with setting up a limited company is the need to register with Companies House, the executive agency in charge of maintaining and regulating all businesses operating in the UK.

In order to do this, the business in question must have the following:

  • a company name that conforms to government regulations
  • an address for the business
  • at least one director
  • at least one shareholder
  • the agreement of all initial shareholders to create the company, known as a memorandum of association
  • details of the company’s shares and the rights attached to them, known as a statement of capital
  • written rules detailing how the company will be run, known as articles of association

After completing this process, the business will receive a Certificate of Incorporation showing the company’s number and date of formation, thus confirming its status as a legal entity. Anyone having trouble with the intricacies of this process should bear in mind that accountancy and legal services are available nationwide to provide assistance.

Types of limited company
It is also worth bearing in mind the different structures that exist for limited companies and deciding which format will suit their needs best. Some private limited companies are limited by shares owned by their members, meaning each shareholder is liable for the original value of the shares they were issued but did not pay for.

Others are limited by guarantee, meaning the members of the company – who are not called shareholders in this case – agree to financially back it up to a predetermined amount.

Additionally, firms can establish themselves as public limited companies, also known as PLCs. This allows them to offer shares to members of the public to raise additional capital, although such companies need to have at least two directors to make management decisions, as well as a company secretary.

By considering all of these factors and options, contractors can ensure they take the right strategic direction for their business and make the most of all the benefits that becoming a limited company can provide.

Jonathan London Written by Jonathan London

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