Startups in the real world: setting up a limited company

Published January 20^th, 2014 — Updated over a week ago

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So you've read our previous post on choosing an appropriate company structure for your startup and you've decided that a limited company is the way to go. But how do you actually go about setting one up?

Firstly it's important to note that there are several types of limited company. The most common are the public limited company (Plc) and the private company limited by shares (Ltd). For virtually all startups you don't need to worry about the public limited company option, as that is intended for larger businesses or those who intend to float on the Stock Exchange, which leaves the private company limited by shares.

In the UK all limited companies (both private and public) are registered with a government agency called Companies House. They maintain a public register of all companies which can be searched via their website, and all companies have to submit certain pieces of information to Companies House once a year, or when a significant event happens in the life of the company (such as a change of ownership).

When registering a new company with Companies House there are a few things you need to think about. These are (in no particular order):

Who will have shares in the company, how many, and what those shares are worth
Who will be the directors of the company
What will be the company's Memorandum and Articles of Association (known as the 'Mem and Arts')

Let's explore those in a bit more detail.

Shares

Shares in a company dictate the ownership of the company. If someone has shares in a company then they own a portion of that company - the size of the portion being determined by the number of shares the person holds relative to the total number of shares making up the company (to keep this simple we are assuming all shares have equal value and rights).

Each share has a value - this can be anything you like but it's most common for each share to have a nominal value of £0.01 (1p). Although in theory you could just issue one share of 1p if there is a single shareholder, this could make it difficult in the future should you wish to give away or sell shares in the company, so it's usual to issue a larger number of shares (typically 100 shares is a popular amount).

When you register the new company you will need to say how many shares the company will issue, what the value of each share will be, and who will have the shares. For most startups you can just keep it simple and issue 100 shares of £0.01 each all to the single founder. This means your brand new company will have a value of £1 - this is the most that you as a shareholder would ever be personally liable for in the event the company fails.

Directors

Every company needs to have at least one director. Directors are legally responsible for ensuring that a company is run in accordance with the law, and are answerable to the shareholders of the company. A shareholder can be a Director, but does not have to be, and equally a Director does not need to be a shareholder.

Prior to 2006 companies were also required to have a Company Secretary, who would be responsible for ensuring the company maintained proper records, submitted annual returns to Companies House and ensured any tax returns were properly submitted to HMRC. Following the introduction of the Companies Act 2006 this is no longer required, but if a company does not have a Company Secretary then it is the responsibility of the Directors to ensure all the legal requirements are still met. Of course a company can still choose to have a Company Secretary as well as Directors.

Again, when you register a new company you will have to tell Companies House who will be the Directors and (optionally) the Company Secretary, and you will have to provide details for each Director such as name, address and date of birth - these will be on the public record.

Memorandum and articles of association

This is quite a complex topic. In short, every company has to have a memorandum (which simply lists the shareholders when the company was first founded) and articles of association, which are the rules for the company. The articles say what the company can and can't do, any special powers that the Directors have, rules for how shares can be sold or transferred, etc.

In general there are two things you can do when it comes to Articles of Association. The simplest thing is not to have any Articles of Association at all, in which case a set of 'Model Articles' that are included in the Companies Act 2006 will apply to the company. These basic articles are suitable for most companies and include clauses relating to appointing and dismissing directors, paying dividends to shareholders, approving the transfer of shares and voting at company meetings. However the model articles do not include a number of clauses that some startup companies may wish to include such as good leaver/bad leaver clauses, drag and tag rules, etc.

In the event that the Model Articles are not appropriate then you will need to supply your own Articles of Association when you register the new company. You should get these drawn up by a lawyer or accountant rather than try to do them yourselves.

Tips and tricks

Although this has been a long article I thought I'd finish with a few practical tips we have gathered with experience over the last few years. Hopefully they may save you a bit of hassle.

If you have a friendly lawyer or accountant then consider using them to set up your company for you. They should be able to draft suitable Articles of Association for you as well as fill in all the relevant forms with Companies House. However make sure they don't charge too much for this - you shouldn't be paying more than a few hundred pounds unless you have very unusual or specific needs that require complex Articles to be drawn up.
If you don't want to use lawyers or accountants there are companies that specialise in forming new businesses (formation agents). These can often be a cheap way to start a company, but again don't pay too much - if you were to register the company yourself directly with Companies House it would only cost £15.
If you use an agent, lawyer or accountant make sure they are registering your company under the Companies Act 2006. Some still register under the Companies Act 1985 which has some restrictions such as requiring a company to have two directors, a company secretary and to send documents to shareholders by post instead of by email. One way to spot this is if there is any reference to 'Table A' - this was the old name for model articles and indicates that your agent may still be using the old Act.
Be wary of anyone that sells "off the shelf" or "pre-pack" companies. These are existing dormant companies which are sold to the would-be entrepreneur. This is quicker than registering a new company (which can take several days) but means the public record will show the previous history of the company, which may include name changes, changes of Directors/shareholders or even previous County Court Judgments against the company. Any of these things can cause problems in the future if a would-be investor is performing due diligence into your company. This can also affect your eligibility for tax relief under the Seed Enterprise Investment Scheme (SEIS).
If you're going to do business overseas consider getting a company seal. Although you don't need this for the UK, some foreign countries (particularly in Eastern Europe) still require certain documents to be stamped with a company seal. If you don't have a seal, you can sometimes get away with drawing a circle about 4cm in diameter with a black biro where the seal should be and writing the company name and registered number in block capitals inside the circle.
Don't lose the paper company registration certificate! It's very hard to get a replacement and you will need the certificate when you want to open bank accounts, establish credit lines, start trading in a new country, etc. Even if the company has been established for years you may suddenly have a need for the original certificate and you don't want that to be the moment you realise it got thrown out when you were clearing out the old filing cabinet.

Useful resources and links

You may find some of the following external resources of help:

Next time

Next in this series: what to do as soon as you've set up your new company. This will include discussions around VAT, bank accounts and what you should do in your day to day running of the new company.