3 important things to consider before setting up a new limited company

The legal registration process required to start a UK limited company is a doddle. It’s inexpensive and only takes a couple of hours if you go through an online company formation agency. However, before you get to the application stage, you need to give some thought to the business name you are going to use, the type of company you are going to register, and the ownership structure of the business.

Company name

Your company name sets the tone for your business. More often than not, a name is be the first impression we have of a company – appearing in internet search results when we’re looking for a particular service or product; seeing a sign outside a store or office; being told about a business through word of mouth or receiving promotional material by post or email. First impressions really matter, so make sure it’s a good one that will appeal and to your target market.

There are no strict rules for choosing the perfect name. All businesses are different and all have varied purposes and values. The important thing to remember, whether you choose an obscure name or one which clearly expresses the nature or aim of your business, is that it should be appropriate, appealing, memorable and succinct. Don’t overcomplicate things, think long-term, avoid puns and anything too ‘in vogue’, and make sure it’s pronounceable and easy to spell.

Aside from the creative aspect of naming a business, you will need to adhere to a number of legal requirements:

  1. Your company name has to be unique, so you will not be permitted to register a name that matches or closely resembles the name or an existing company. This rule is in pale to avoid misleading and confusing the public.

  2. Many words and expressions are deemed ‘sensitive’ when included in a business name, so you must be careful to avoid choosing a name that:

    – Falsely suggests a specific function, business pre-eminence or a particular status.

    – Falsely suggests that your business is qualified to carry out a regulated activity.

    – Includes an offensive word or is offensive as a whole.

    – Suggests that your business has a legitimate connection with the Royal family, the UK government, a dissolved administration or a public authority.

If you wish to include any such words or expressions, you will have to get permission from the Secretary of State at Companies House, or contact the relevant authority which governs the use of the particular word. You can view the full list of sensitive words and their respective authorising bodies in The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2014

  1. Your company name must end with “limited” or “ltd”, unless you are setting up a limited by guarantee company that qualifies for exemption.

It is also a good idea to check any proposed name against the trademarks register to avoid trademark infringement. And you should ensure the name is available to register as a domain name for your website and business email addresses.

Limited by shares or limited by guarantee?

The type of company you choose to register will affect profit distribution and your personal liability for debts. The two most popular company structures are limited by shares and limited by guarantee. Limited by shares companies are incorporated with share capital; limited by guarantee companies are incorporated without share capital.

Limited by shares

For most people who set up a business for the purpose of earning a living, limited by shares is the most suitable and popular choice. This is because you can split the company into lots of ‘pieces’, or ‘shares’. This allows you to co-own the company with business partners or sell shares to other people in return for investment.

Each shareholder is entitled to take a proportion of trading profits relative to the percentage of their share ownership. It also means that each shareholder is responsible for contributing the nominal value of their shares (usually £1/share) to business debts if the company itself cannot pay them.

You also have the option of setting up your company with just one share that you yourself own. Or you can issue lots of shares and own them all until a later date when you wish to sell parts of the business to other people.

Limited by guarantee

This structure is generally only used by non-profit or charitable companies that do not distribute surplus income to their owners. There are no shares or shareholders, so the company is not split into pieces and sold to other people – a limited by guarantee company is owned and controlled by guarantors who agree to contribute a guaranteed sum of money in the event of insolvency. Most guarantees are set at £1.

You can certainly use this type of company structure for a profit-making business venture, but it’s not standard practice. The limited by shares structure offers greater flexibility and is therefore more suitable if you intend to take some or all of the profit as personal income.

Ownership

Limited companies must be set up with at least one member. A member is someone who owns the company. The owners of a limited by shares company are known as shareholders; the members of a limited by guarantee company are known as guarantors. If you are going to be the only member of the company, the ownership structure is pretty straightforward – you will be responsible for making all of the decisions, thus you will have 100% control of the company and its profits. However, if you are setting up the business with other people, you must think carefully about how much decision-making power and profit entitlement each person has.

The articles of association – the governing document by which your company and its members must abide at all times – should address these important issues in detail. Ideally, you should also draw up a private shareholders’ agreement. Once your company has been incorporated, it’s not as easy to change the ownership structure or alter the articles and shareholders’ agreement because you will likely require the approval of other members. Make sure you get it right from the beginning.

What you don’t want is to find yourself in a situation where you are unable to make decisions and control the company and its profits in the way you want, simply because of a disagreement with other members. This could stifle your future plans. It doesn’t’ matter if they’re close family or good friends, there’s no guarantee that you’ll always agree and remain on good terms during the course of business. By carefully drafting the articles and agreement prior to company formation, you can avoid unnecessary difficulties that could damage the business and important relationships.

Graeme Donnelly

Graeme Donnelly is a founder and managing director at Rapid Formations, the UK's leading company formation agents. He regularly writes about entrepreneurship, setting up a business and company formation related topics.