Incorporating Your Startup in the UK

Incorporating your startup means that your business becomes a legal entity with a separate legal identity from you, the business owner. As a business owner in England, you may be exploring the possibility of incorporating your startup. This article will explain some of the key pros and cons of incorporating your startup business. It will also advise on when the best time for incorporation might be for your business. 

Incorporation 

Incorporating a startup means that you create a new company, which becomes the owner of the business and all of its assets. You will no longer directly own the business assets. Instead, you will own shares in the company. These shares give you various rights in the company, such as the right to receive a dividend from the company’s profits. However, as a shareholder, you do not have any direct influence over the affairs of the company. This is the job of the director, which is a role you will also have. 

As a director, you assume many legal obligations. For example, you will be responsible for filing your company’s annual accounts, as well as ensuring the company pays any corporation tax it owes. You will also have to inform Companies House about any changes you make to the company, such as changes to its share capital business. 

It may sound confusing, but the law treats the role of the shareholder and director as distinct. This is despite the fact that, as a small business incorporated as a private limited company, the owner is both a shareholder and director. 

Pros of Incorporating Your Startup

Incorporating your business comes with a number of benefits.

Limiting Your Personal Liability

One of the main benefits of incorporating your business is to limit your personal liability to the business. This is in fact what the term “limited” refers to in the phrase private limited company. Absent incorporation, there is no distinction between you and your business. But following incorporation, the business has its own legal personality, which means it can assume its own obligations. As a shareholder, these obligations do not bind you. Most importantly, if the business fails, absent fraud or misconduct, you will not have to personally meet the company’s debts. 

That said, the law does not treat limited liability as automatic or guaranteed in all cases. 

Raising Capital 

Unlike other business structures, companies have share capital. This means ownership is apportioned by the number of shares held by shareholders. This makes it much easier for the business to raise capital, because owning shares automatically gives shareholders certain rights. Therefore, if you intend to approach outside investors like venture capital firms, you will want to incorporate beforehand. 

Maximising Brand Image

There is something to be said for the fact that trading through a limited company gives your business brand more prestige. Larger businesses are more accustomed to dealing with limited companies. In fact, by not incorporating your business, you risk stunting your business’ long-term ambitions. 

Cons of Incorporating Your Startup

Incorporating your business can also come with some detriments. As a result, it is important that you incorporate your business at the right time. Being Accountable to Companies House

As the director of a limited liability company, you will be accountable to Companies House for your various obligations as a director, such as filing company records. Failure to comply with the requirements of Companies House can result in a fine. Therefore, you must be prepared to meet your obligations when you begin the incorporation process. 

Higher Fees for Accountants

Private limited companies must keep all of their records properly organised, especially financial ones. To aid with this, it is likely that you will want to hire the services of an accountant. This is likely to cost more money than if you are trading through a sole trader model for two reasons:

• accountants charge more to manage the books of a limited company; and 
• the legal obligations of companies are much more stringent and therefore require the accountant to put more energy in. 

It is worth keeping in mind, however, that a business accountant may also help you save money, for instance, by employing more tax-efficient structuring. 

Public Disclosure Requirements 

As a private limited company, you must make certain information available to the public. This will usually not be overly extensive and you will still have some discretion regarding the precise details you must make available. 

How to Incorporate 

Once you have decided that incorporation is the right choice for you, you can begin the incorporation process by:

• finding a name and address for your company;
• appointing at least one director and one shareholder; 
• checking if you will need a memorandum and articles of association for your company; and
• registering with Companies House.

Timing the Incorporation 

You may wonder when is the best time to incorporate your startup. The answer depends on the particular circumstances of your business. As a guiding metric, you should ask if your business’ turnover is sufficient to justify the increased cost it will incur once it incorporates. 

For instance, to ensure your business meets its tax and employee obligations, you will almost certainly want to instruct an accountant on a monthly basis. This may cost your business an additional £50-100 per month at a minimum. If your monthly revenue is £4,000, the added expense may not be detrimental. But if your turnover is £1,000, it could be. 

Of course, if your business entails more risk, incorporating it as soon as possible may be sensible so you obtain the benefit of limited liability. 

Key Takeaways

As a business owner in England, you may wish to incorporate your business at some point. Early-stage startups can sometimes benefit from working as a sole trader. Still, as your business grows, you will likely want to incorporate it as it can help you manage your business finances and receive funding from investors, such as venture capital firms. Once you start this process, it is often a good idea to seek professional advice from an accountant and lawyer to ensure you manage the process appropriately. 

If you need help with your business, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions