Key Issues In Forming A Company

If you are about to start a new limited company, you need to consider a number of important issues. Getting them right at the beginning will save you time and trouble and money later on.

There are two types of company, those limited by shares and those limited by guarantee. The latter are usually charities which are not profit making and who have trustees not directors. It is companies guaranteed by shares that we are considering here as they are the usual vehicle for commercial businesses. The 'guarantee' simply means that, in the event of business failure, the shareholders are only liable for the amount of unpaid shares in the company. For that reason, most small companies only have a share capital of one or two £1 shares.

So what are the issues you need to understand before forming the company?

1. Who Owns The Company?

It is the shareholders who own the company and benefit from any profits by means of dividends which are shared in proportion to their shareholding. It is normal for a one-person company to have only one share with a nominal value of £1. If two shareholders are required, then two £1 shares would usually be issued. It is no longer necessary to set a limit on the agreed share capital.

2. Who Runs the Company?

The shareholders own the company but the directors are responsible for running the company in the interests of the shareholders. In a small company, all or many of the directors may also be shareholders, but they need to understand clearly their respective roles. To form a company you must at least appoint one named director. You will need to declare whether they have any other company directorships when applying to form the company. Most company directors will be required to complete a Self Assessment Tax Return.

3. Will Anyone Be Employed By The Company?

You may want to employ people to work in the company. Initially that may be one of the directors but eventually there may be others. Once you decide to employ a member of staff you will need to set up a payroll scheme for the company. Until then, there is nothing further to do. You should though ask for professional advice about whether directors should receive at least a minimum salary to maintain their National Insurance Contribution record and potentially save tax by taking dividends rather than salary.

4. Who Is Responsible For The Company Administration?

Since the 2006 Companies Act was enacted it is possible to choose whether or not to have a Company Secretary. For a small company they do not need any particular qualifications but need to be organised as they are responsible for ensuring that the statutory company paperwork - annual accounts, corporation tax return and annual return are completed and filed on time. If you set up the company with a company secretary, then an accountant can perform this function for you for a small fee. But there is no necessity to have a company with a company secretary if you are confident of doing all the paperwork on time by yourself.

5. Who Will Deal With The Accounts?

Once you start trading you will need to keep accounting records in a way that enables you to monitor the progress of the business as well as allow you to prepare the annual statutory accounts. Many companies wait until the year and to organise their accounting records but my experience is that this usually proves to be an expensive mistake. It would be wise to seek advice on how to keep your records at the start of the business and start as you need to go on.

You should be able to obtain good and inexpensive professional advice when you start the company but, at the very least, you should ensure that you consider the issues carefully before launching out. Plenty of people start and run limited companies successfully so there is no reason why you should not? As ever though, preparation is key and good advice is worth seeking out.