If you’re considering forming a UK limited company, we’ve some good news. Creating a company is exceptionally swift, simple and can be completed entirely online – meaning you can do it from the comfort of wherever you have an internet connection.
However, before you do take the plunge and set up your company, there are a few common company formation mistakes you should be aware of. In this post, to ensure your company formation journey goes as smoothly as possible, we’ll highlight the key errors people often make when forming their company.
A word on business structure: There are a number of business structures available in the UK to the prospective entrepreneur, with the most popular being private companies and sole traders. For the purposes of this post, we’re going to focus on private companies (and in particular, private companies limited by shares). This type of limited company has a number of benefits, including:
- The owners (known as shareholders) of the company have limited liability, meaning that if the company were to fall into financial difficulties, their personal finances are protected
- Limited companies come with a level of prestige that sole traders do not, making the proposition of working with the business more attractive to potential customers, suppliers, partners and employees
- Generally speaking, limited companies are a more tax-efficient business model when compared to sole traders
Now, let’s look at the common mistakes that you need to avoid when forming a company:
Mistake 1: The wrong limited company type
There are a number of company types, with different structures suiting different industries and requirements:
- Private companies limited by shares – suitable for most business types (this is the most popular limited company structure)
- Private companies limited by guarantee – suitable for non-profit operations such as charities
- Limited liability partnerships – suitable for professional service providers such as solicitors, accountants and dentists
- Public limited companies – suitable for large businesses that wish to sell shares on stock markets
Starting up with the incorrect business structure can cost you and your new business time and money. If you are unsure what structure is best for you, we recommend seeking professional advice.
Mistake 2: An unsuitable company name
The are various restrictions in place in regard to what you can and can’t name your company. Firstly, the name must be unique. In fact, it can’t even be similar to another name on the Companies House register (Companies House are the government agency that oversees UK company formations).
The second thing you need to be aware of is ‘sensitive words and expressions’. This is a list of words (and yes, expressions) that can not be used unless you are able to provide the necessary documentation. For example, to use the word ‘dentist’ you must request permission from the General Dental Council. You would then need to attach this permission as part of your company formation. Fortunately, you can check whether your company name is available and if it includes any sensitive words or expressions via our company name search tool.
So, how can you make a mistake when naming your company if tools such as the above help prevent this? It’s a simple case of picking a name that you realise further down the line, was a bad choice. To stop such situations, put serious consideration into the name.
Does it limit you to a specific service or location? Is the spelling easy to remember? Is a matching domain name available? Could the name be misconstrued? Do you want to include your own name as part of it? These are all things you need to think about when picking the perfect moniker for your new business.
Whilst changing a company name post-formation is easy enough, and relatively inexpensive – it’s important to know that the original name will always be visible on the Companies House register, which could cause embarrassment.
Mistake 3: Being ignorant of the Companies House public register
When you form a UK limited company, specific information about the company and the people associated with it – such as the directors and shareholders – is placed on the Companies House public register. This is to give transparency (and in turn, trust) to the limited company structure.
Here’s some of the information that goes on the register:
- Company name
- Registered office address (the official address for the business)
- The nature of business (classified using the SIC code)
- Director’s name, service address, date of birth, nationality and occupation
- Shareholder’s name, address and shared information
As you can see above, there are a number of addresses that are placed on the register. Using a residential address as the registered office, service address and shareholder address is allowed by Companies House. However, this is not something we recommend – as it makes the address (and the individual associated with it) vulnerable to fraudulent activity.
Many people form a company unaware of this and unknowingly make their personal address public.
You can avoid this mistake by using an alternative address as all of the above, something that is permitted by Companies House, provided that any official mail delivered to the address is made accessible to the director(s).
A number of our company formation packages allow you to use our Covent Garden, London address for these.
Mistake 4: Unnecessarily complicated share structures
One of the key steps of the company formation process is adding your shareholders and allocating their shares.
Once you have named a shareholder, you are able to choose:
- The number of shares they will hold
- The currency of the shares
- The price of the shares
- The particulars related to the shares (for example, the voting rights attached to the shares)
The number of shares that a shareholder has, and the value of these shares, represents how liable the shareholder is if the company encounters financial difficulties (the higher the shareholding, the more liable they are). Despite this, companies are often erroneously formed with shareholders taking on either a large number of shares or highly valuable shares.
When starting up, we recommend choosing a basic share structure, allocating a small number of shares with a minimal value (such as £1 each). Even if the company is to have multiple shareholders with differing percentages of ownership, this can still be represented with a small share capital.
It’s far easier to add new shares to a company than it is to remove unwanted shares.
Mistake 5: Spelling mistakes and typos
Even in a document as important as the IN01 (the one used to form a company), it’s amazing how often spelling mistakes and typos are made.
Company names, director names, addresses, dates of birth – all can be input incorrectly.
Fixing mistakes can cost time and money and in some instances, traces of the blunder can still be found on the public register, which creates an unprofessional image for the company.
It goes without saying, when completing the company formation application, double-check all the information you have provided before hitting the ‘send’ button.
How 1st Formations can help
1st Formations are the UK’s best-rated company formation agent, with thousands of 5-star reviews on Google and Trust Pilot.
We offer a range of company formation packages for both UK and non-UK based customers, all of which make the company formation process as quick and simple as possible.
What’s more, with our Pre-Submission Review service, one of our company experts can check your application for mistakes before it’s sent to Companies House, ensuring your application goes as smoothly as possible.
Prices start at only £12.99 – choose your company formation package now
Read the orginal article: https://www.eu-startups.com/2023/06/5-mistakes-to-avoid-when-forming-your-company-sponsored/
