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What is Company Formation?

If you haven't already learnt, The Company Wizard is a formation agent. We incorporate new companies and limited liability partnerships (LLP) in the UK. But if you're new to the world of business, you may be struggling a bit with some of the terminology used or have some questions about what's right for you and your business. What is company formation? Should I be incorporated as a company? Is a sole trader set up the right way to go?

What is the formation process?

The process of company formation is pretty straightforward and can be done in a number of ways. You can register direct with Companies House, or you could use a formation agent such as The Company Wizard. Sometimes your accountant can even do it for you.

When the formation process takes place, the business is incorporated at Companies House as a limited company. Once it's complete, the company becomes a new legal entity, completely separate from its directors and other staff members; it's treated as an individual with it's own bank accounts, finances, assets, liabilities and more.

If a limited company reaches a point where it can no longer trade (such as lack of business), it enters a period known as liquidation where any assets that the business owns are sold to pay for its liabilities. At this point, the owners (shareholders or guarantors) can't be held personally liable for the debts beyond what they've invested. So someone who has invested £100, cannot be held liable for any more than £100. This is called limited liability and it's one of the main advantages of a limited company. A sole trader doesn't have this protection. As there's no legal separation between a sole trader business and the owner, they become personally liable for all of the debts their business has (known as unlimited liability).

Once the company has been incorporated, you will be supplied with a Certificate of Incorporation which features your company's legal name (e.g. The Company Wizard) and it's registered number (e.g. 05100477). These are then placed on a public register along with details of its directors. With a sole trader or traditional partnership, this isn't a requirement.

Once that's done - you're good to go!

But is forming a company right for me?

There's no definitive answer for this as it highly depends on your business, including what you offer (services and goods), where you operate, how you operate, the businesses income, and other key points. This sort of question can normally be passed to your accountant or business advisor who should be able to give you more of a right answer than what we can.

One of the main reasons that a business registers as a company is for the limited liability to protect its shareholders. But there may be tax advantages to being a limited company too.

One thing to bear in mind, is with a limited company, your registered and service addresses are on the public register, along with any documents submitted to Companies House (some confidential information is removed, such as parts of a director's date of birth). Sole traders and traditional partnerships (not LLPs) don't need to submit any information for a public register.

I'm still undecided

Check out our complete rundown on the pros and cons for incorporating a company in our previous blog post. If you have any queries about the incorporation process, we are here to help - contact us today. Alternatively, check with your accountant or business advisor.

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