Whether you’re running a franchise or running your own business, the basics can be tougher than they seem. Figuring out how to setup a limited company can be an intimidating process, with many different technical terms to wade through, so we’ve put together a simple guide to help you through.
While starting a franchise takes out a lot of the admin independent business owners face, there are still a number of legal and tax considerations you’ll need to think about. And as your business grows, it makes sense to think about its legal structure.
This step-by-step guide will answer all the most common questions about limited companies, from setup requirements to tax benefits. To view more resources for new business owners and tips for franchisors, check out Point Franchise’s collection of startup-focused articles.
What is a limited company?
We’ll start at the beginning. A limited company is a type of protective legal structure. If you’re a sole trader, there’s no legal distinction between you and your business, which makes you fully liable for any and all losses that your business might incur. A limited company creates that level of legal distance, protecting you from risk.
A limited company divides up ownership via shares. If you own shares in a limited company, you’re a shareholder. If the limited company runs into financial difficulty, you won’t be liable for its debts - you’ll just lose out on your shares.
What are the advantages of a limited company?
Although setting up a limited company requires time, paperwork and responsibilities, it also comes with many benefits, including:
- A legal identity separate from the company. As discussed above, you may not be fully personally liable for losses incurred within your franchise if they relate to company assets.
- An increased sense of professionalism. The additional setup steps required to form a limited company will make your business appear more professional, and therefore more trustworthy to other businesses.
- Tax benefits. By paying corporation tax, you’ll see more of your profits. You’ll be able to set your own salary and supplement this income with dividends. Dividends are beneficial in a tax sense because the first £2,000 of yearly dividend income is tax-free. Anything beyond this amount isn’t subject to income tax or national insurance, as corporation tax has already been paid [UK Government].
Is a limited company the right setup for my business?
A limited company might be the perfect move for your franchise, but it’s definitely not the only option. As you figure out how to start a business that works for you, make sure to do your research on all the available options. Make decisions that suit your situation. Other setups to consider include:
- A business partnership
- A social enterprise
- An overseas company
- An unincorporated association
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What is required to set up a limited company?
Using this seven-step setup process packed with helpful top tips, you’ll be able to get your limited company off the ground in no time.
1. Choose an appropriate name
Arguably the most creative part of setting up your limited company, this stage is vital. Especially for franchisors, a company name should be evergreen and unique. There are a few rules to bear in mind during the name selection process. The name chosen:
- Cannot be offensive
- Cannot include any sensitive words
- Cannot suggest any links with the government or any local authorities unless permission has been explicitly granted to do this
- Cannot be the same as existing companies or trademarks
2. Select the right kind of limited company for you
There are two main types of limited company, and you’ll likely have heard their associated abbreviations before - Private Limited Companies (LTDs) and Public Limited Companies (PLCs).
PLCs have the advantage of being able to raise more capital via public investment, but they’re also subject to more regulations than LTDs. As PLCs offer shares to the public, the risk is more widely spread if something goes wrong. However, the initial cost of investment will tend to be higher for PLCs, as will the risk of a shareholder takeover. As a franchisee, an LTD will most likely be the right option for you.
3. Decide on your director, company secretary and shareholders
You’ll need to appoint and secure these people in advance. Be aware of the responsibilities required for each role, and make sure your selection process is thorough and unbiased. The role of company secretary isn’t a necessity, but the appointment of a company secretary will definitely make life easier for all involved.
One of the company shareholders will need to take on the role of director. Directors are responsible for:
- Ensuring rules and regulations are followed
- Keeping records and reporting any changes
- Filing to HMRC every year
- Informing the necessary parties when they might benefit from a company transaction
- Paying corporation tax
- Creating and maintaining records for anyone with significant control over the company
At this stage, you’ll also need to identify who those people with significant control over the company are. A person with significant control, or a PSC, is someone with company voting rights, or someone who possesses more than 25% of the shares in your limited company.
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4. Register your company
In order to do this, you’ll need to register your official address, and select a Standard Industrial Classification of Economic Activities (SIC). Your SIC will identify the type of sector that your franchise is operating in. (To browse the wide range of different franchising sectors, visit Point Franchise’s UK franchise directory.)
5. Register with Companies House
You’ll then need to register with Companies House. This will cost £15, and most businesses will also be able to register for corporation tax at this point.
In order for Companies House to correctly identify your franchise or business, the company director will need to supply the company SIC, the registered company address, and details of the company ownership (number of shareholders, number of directors, so on).
Once you’ve completed everything that’s requested of you, your limited company could be formed in Companies House within a couple of hours.
6. Complete the incorporation process
It’s important to remember that Companies House is responsible for all limited company registrations within the UK. To complete the incorporation process, you will need to prepare the following documents:
- Memorandum of Association - This includes the limited company name, location, and SIC.
- Form 10 - In this form, you’ll need to write the name, address and business address of your company director/s.
- Form 12 - In this form, you’ll need to confirm that your limited company complies with the 2006 Companies Act.
- Articles of Association - These will outline the powers of the director/s, and determine the shareholder rights.
- Any further documents relating to the running of your company.
What should I be aware of before setting up a limited company?
Before you start the setup process required of a limited company, you need to remember it might take some time to complete. There’s lots of admin involved in the formation of a limited company, and you’ll need to consider your legal responsibilities too. Before you head down a paperwork-filled path, make sure that a limited company is the right structure for your franchise.
It’s also worth noting that, depending on whether your limited company is an LTD or a PLC, certain information about your franchise will become publicly available via Companies House, such as the registered business address and the details of the current director/s.
Forming a limited company for your franchise
The path to becoming a limited company might seem complex, but the benefits are extensive. It’s particularly useful if you’ve got big ambitions and plan to open multiple locations of your franchise, or branch out into other business ventures. If you’re really not sure where to start, you can seek the help of an accountant, who will be able to walk you through the process.
Lily Sweeney, Point Franchise ©