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Things To Consider When Forming A Company

If you’re thinking about forming a company in the near future, there are some considerations you need to make first. Whether this is your first time running a company or your hundredth, there are always things you need to keep in mind and mistakes you need to avoid making.

Let’s start from the beginning and look at the different business structures you could use for running your company.

Business structure

First, decide whether running a company is the right direction for your business idea or whether you should be a sole trader. Then decide which type of company you want to register.

Each of the options has different legal requirements and obligations you need to stay on top of:

  • Sole trader: not a company; they are self-employed individuals. Even though sole is part of the name, sole traders can employ others, so you don’t have to run the business on your own. However, as a sole trader, you are personally liable for any debt that the business holds.
  • Limited company (Ltd): a popular choice for small and medium businesses (SMEs), a limited company protects its owners through limited liability. However, it comes with additional legal obligations you need to keep on top of.
  • Limited Liability Partnership (LLP): similar to a limited company, a partnership structure allows more than one person to invest in the company. Each partner is only liable for the amount they invest in the company, similar to shareholders in a limited company.
  • Public limited company (PLC): should only be used by a larger company that wants to sell shares to the public in the hopes of raising funds. Selling shares allows the company to raise large investments; however, this structure comes with additional regulatory requirements compared to other company types.

There’s no right or wrong decision when it comes to choosing which type of business you want to use and register; it comes down to how you want to run the business and the personal risks you’re willing to take as a business owner.

Why do business owners need protection?

Business owners need protection from business risks, such as debts and contracts. For example, if a business owes a supplier £1,000, under the sole trader setup, you are personally liable for the full amount. This means that if the business cannot pay, the creditor can pursue you personally for the £1,000, potentially leading to the loss of personal assets outside of the business.

However, with a limited liability setup, you and the company are legally separate. This means that if the business owes a supplier £1,000, you are only personally liable up to your liability limit (typically a nominal amount of £1). Any remaining debt must be recovered from the business itself; however, this can lead to liquidation if it cannot satisfy the debt.

Choosing the right company name

Choosing a company name isn’t always straightforward. If there is more than one director, you need to agree on what you want the company to be called and known as. These are two different things, as you can have a legal name and a trading name; however, most companies use their legal name as their trading name.

Once you’ve agreed on a company name and want to move ahead with it, you need to ensure that no one else has that company name and that it doesn’t include any words or phrases that are disallowed by Companies House.

Before going through the legalities of choosing a company name, let’s start with the basics of how to choose.

Firstly, consider whether the name you want to use is too complex. After all, you want your customers to be able to find you. If your name is too long, or too confusing, you could lose traction with customers, as they may be unable to recall your business name or spread it through word of mouth.

Secondly, consider whether you want the name to reflect your mission and values as a company. For example, do you want to include the word “bespoke” or “artisan”? Or what about “green” or “sustainable”? These may not be necessary, but they can help your customers to understand your business concept and whether they share your values.

What are the legalities of choosing a company name?

If Companies House doesn’t accept your chosen company name, they can reject the whole application; therefore, you need to ensure your company name adheres to their guidelines.

  • The name must be original and not already used by another registered company
  • The name cannot be too similar to another company that’s already registered (for example, by adding punctuation or special characters)
  • As a limited company, your business name must end with “Ltd” or “Limited” (or the Welsh equivalents)
  • Your company name cannot be offensive; this might be subjective and what offends one may not offend another, so it’s best to err on the side of caution.
  • Your company name cannot contain sensitive words that may mislead the public, for example, by claiming a connection to the government, local authorities, or royal family (for more information about sensitive words and phrases, check the Companies House guidance)

Choosing a registered address

As a company, you need to have a registered address where all official documents will be sent. This doesn’t have to be your home address or a premises you own; however, there are rules your registered address needs to adhere to. You can find a full list of these rules on the GOV.uk website.

In short, a registered address must:

  • Be a physical address in the UK
  • Be in the same jurisdiction as the company is registered in; for example, a company registered in Scotland needs to have a registered address in Scotland

You also must ensure that the address is “appropriate”, which means that someone from your company must be made aware of any post that’s received at the address and, if required, the sender is able to obtain proof of delivery.

Because of these requirements, you are now unable to use a Royal Mail PO Box as your registered address.

Decide your directors and shareholders

Part of running a company is deciding who will make the decisions and run the company. Each company must have at least one director; this person is responsible for ensuring that the company upholds all of its legal obligations, including filing annual accounts.

These can differ from shareholders, who own a share of the company and therefore have the right to vote on matters arising within the company.

For more information about the differences between directors and shareholders, check out our previous blog post: Directors, Secretaries and Shareholders, oh my!

Finalise how you want the company to be run

The final step is deciding how you want the company to be run and how you want decisions to be made. 

For decisions to be legal within a company, they have to be made in line with the rules set out in the Articles of Association. Most companies use what’s known as the model articles when they’re first venturing into the business world. However, model articles are not always fit for purpose for every type of business, so some businesses must adopt bespoke articles. This needs to be set out during the registration process; therefore, it’s best to read and understand the model articles before you set up the business using them.

The articles set out everything that happens within the company, including directors’ powers and responsibilities, and how to appoint and remove directors. They also cover voting powers and the minimum number of votes required to pass a motion within the company. As you can see, it’s essential that your company uses articles of association that are fit for purpose and align with how you want the company to be run.

For more information about the articles of association, our previous blog post outlines what they include and what they mean for running a company: What are the Memorandum and Articles of Association?

These are the basic considerations you need to make when running a company. Once you know what you need to consider, you can learn what you need to avoid doing in order to start your company on the right foot.

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