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Company Formation Myths Debunked - Part 2

Last month we explored some common myths around company formation, this month we’ve found some more myths to look into. So, without further ado, let’s start cutting through the fiction so we can get to the fact.

Once upon a time written down

Myth 1 - It’s expensive to form a limited company

This is partially true, if you’re living in 1975 that is. It used to be that company formation cost £50.00, which is the equivalent of £525 in 2021.

Now though, company formation through Company Wizard can cost you as little as £13.95, which is much cheaper than it used to be.

Myth 2 - It takes a long time to register a company

This can vary depending on the method of formation that you choose, on average though, it takes 3-6 hours for the application to be processed and approved if completed online. So you could be registered on the same day you complete the application.

However, if you use the Companies House postal application, it can take 8-10 working days to process it, and there is an increased chance of your application being rejected.

Myth 3 - You need an accountant to form a limited company

This is another myth that used to be true in times gone by, but with the advancement of technology and the use of online forms, the process has now been made much simpler.

Many more people are choosing to set up their own companies using a formation agent, or the Companies House website.

Myth 4 - It is better to issue a lot of shares

Every share represents a shareholder’s personal liability for company debts. Therefore, the more shares you issue, the higher the financial liability of its shareholders.

If the company only has one shareholder, then there is no need to issue more than one share; unless you are planning to sell the shares as an investment.

Myth 5 - The value of shares issued reflects the size of a company

Scrabble tiles spelling share

The nominal value of the shares issued does not reflect the size of the business, it simply reflects the limit of the shareholders’ liability.

For example, a large company that is worth millions might only have one or two shares that are owned by one or two shareholders, whereas a small start-up could have 1000 shares split between 100 shareholders.

Myth 6 - Shares need to be paid for at the time of incorporation

This isn’t always the case, however, you will need to check your Articles of Association and/or shareholders’ agreement.

Under the ‘Model Articles’, shares issued at the time of incorporation do not require payment. However, all shares allotted after incorporation need to be paid in full at the time of issue.

Myth 7 - Shares can only be issued in GBP

Most UK-based companies issue shares in GBP, however, companies are permitted to issue shares in any denomination or currency.

This may be necessary for one or more share classes if a company carries out significant trading activities in a different country, or if they have major non-UK-based investors.

Myth 8 - Anyone can register a company

There are very few barriers to registering a company in the UK. However, you cannot register a company in the following circumstances:

  • You are under 16 years of age
  • You are undischarged bankrupt
  • You are a disqualified director

There are no restrictions based on your residency or nationality, which means that non-UK residents are permitted to set up and run a UK-based limited company.

Myth 9 - You need at least two people to form a limited company

This is true to an extent, you need at least two shareholders (and a company secretary) to form a public limited company (PLC), but you only need one shareholder to form a private limited company (LTD) in the UK.

The same person can be the sole director and sole shareholder, meaning the one individual has full ownership and control of the business, retaining 100% of any profits.

Myth 10 - You need to define your business activity and not deviate from it

When you register with Companies House, you need to choose a specific Standard Industrial Classification (SIC) code to describe the nature of your business.

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.

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