This writeup is for entertainment purposes only. IANAL. Consult a professional before doing anything shown here.
This writeup is specific to UK law, because that's what I'm familiar with. I will also be only talking about a private company limited by shares, as that's by far the most useful kind for an individual or small business. Anyone who knows the procedures in other countries could add a writeup below.
I'm in the process of setting up a company. It will be quite a simple arrangement and I don't expect it to cost me more than the £20 registration fee, plus a few hours of my time. This is the second company I've formed, so I hope to be able to show to make the process as easy and as cheap as possible, and avoid some annoying and potenially expensive pitfalls.
Why would you want to set up a company?
There are several reason why you may choose to form a limited company rather than running your business as a partnership or sole trader. Firstly there is the principle of limited liability. The law recognises a company as a "person", separate from the people who own it. A company is not its shareholders. This means that if everything goes wrong, the shareholders are not liable to lose any more money than they have already invested in the company. If your company goes tits up, the company's creditors can't come and reposess your car. The exception to this is if the directors have are guilty of fraud or other malpractice, but you weren't planning any of that, were you?
The second reason is structure. A company issues shares, which amounts to selling bits of itself, and these can be divided among partners and investors. This is the reason I set up my first company. We were looking for venture capital and our investors would want to receive a chunk of the business in exchange for their piles of cash. Receiving funding meant our company's structure underwent many changes, but we were able to do this by issuing more shares, appointing new directors and a few other simple form-filling exercises.
The third reason to incorporate is tax, however this is not as useful as it used to be. Gordon Brown has made several important changes to tax rules in the past couple of years designed to encourage small business, but then realised that too many people were following the advice in this writeup, so the IR35 rules were brought in. These are designed to stop people claiming to be self-employed when they're actually working for an employer. However, there are still some cases where a limited company can be beneficial.
How do I do it?
The procedures for setting up a company in the UK are some of the simplest in the world. All of the forms can be downloaded as PDFs, and the registration fee is just £20. There is still a thriving trade in selling ready made, off the shelf companies, but it's often easier and always cheaper to go for the DIY option.
The first thing to consider is how many directors will you have. It is possible to have a company with just one director, but, as I'll explain below, many things are simplified if you have at least two. In any case, you'll need to have a company secretary who can't also be the sole director, so you'll need at least two people anyway. A company secretary isn't like a normal secretary. It's not about making tea, booking appointments, and buying flowers when you forget your anniversary. A company secretary is legally responsible for the form filling that's such a part of running a company. If you mess up with your annual returns, the secretary and directors can be liable for big fines and a criminal record.
Almost anyone can be a company director. The only exceptions are people who've been banned from being one by a court, or undischarged bankrupts, but even those can get special permission from a court. In Scotland they don't let you become a director if you're under 16 years of age, but it appears that there's no such restriction elsewhere in the UK. The Man might make a case that your 4 year old cousin is not capable of performing her fiduciary duties though, so it's probably not a good idea.
What will I need?
There are a few forms and legal documents that you'll need to start with. The web is your friend here. I'll run through them one by one.
This form is where you list the first directors of the company, as well the company secretary and registered office. You can download it from Companies House:
If you open these forms in Acrobat Reader, you'll be able to enter your details directly and then print them out, sign them, and send them off.
This is the form that certifies that you've completed all of the other documents correctly and are ready to form a company. For this reason it should be signed and dated after all of the others. It can be signed by a solicitor on your behalf, or by any of the directors or company secretary. You can also download this.
It could be the most difficult part you'll have to complete, for one reason: it needs to be witnessed. Unlike most legal documents which can be witness by almost anyone, only certain people are qualified to witness it. These are defined as "a commissioner for oaths, a notary public, a justice of the peace or a solicitor". A legal person, essentially. Find a tame one, or pay up.
In it's most basic form, this is a document that lists the company name, the registered office and what the company will do. It's totally acceptable to list this as "carry on business as a general company" or something equally vague. If you don't use that broad statement, you have to be certain to list everything that the company will ever do, otherwise you can get in big trouble.
These are easily the most complicated document involved in setting up a company. They list the rules of the company and the terms under which its run. The set we had made up after we got investment cost us thousands in legal fees. Luckily there's an easier and infinitely cheaper way. The government has been good enough to give us an example to base ours on. These default Articles are known as Table A, and are taken from a statutory instrument published by the government. Specifically, The Companies (Tables A to F) Regulations, 1985. Table A is a good, thorough document, and your company can choose to adopt all or in part as its Articles. If you choose to do this in full, as I did, you don't need to include any Articles in your application, but you have to bear in mind they're not suitable for everyone. To go into any detail on this you'd need an expensive lawyer, but the most important point is that you can only adopt Table A if you have at least two directors. You can buy a copy of Table A from The Stationery Office, or search with Google and you'll find several copies on the web.
Currently this is £20. You can pay £80 if, for some reason, you want same-day registration.
There are several restrictions on what you can call your company, but they are far too numerous to go into here. In short, it needs to be different from any existing company, include the word Limited or Ltd. at the end, or their equivalents in Welsh. There are more restrictions if you use words that imply you're some sort of authority, such as institute, international, British, association, co-operative. Take the time to research before you call your window cleaners The Royal Institute of International Glazing Chemical Studies Inc.
Your company needs to choose somewhere as its registered office. This is where any legal documents for the comapany are sent. It can be a mailing address (but not a P.O. Box number), but you'll need to make sure you get any important documents quickly. If someone serves you a writ you want to know about it. You can use your home address, but you need to make sure you're not restricted in some way by your lease or planning permission. The council may come after you for business rates on the property too, but this is unlikely, as a recent court case clarified the law in this respect. You need to put a sign outside the front of your registerd office, clearly stating what it is.
This is the registered office of
As a director, you'll be sent a booklet from Companies House reminding you of your duties. these including keeping the register of members up to date, keeping minutes from meetings, and any written resolutions you make, as well as ensuring your accounts are delivered on time. Most small companies are exempt from auditing, but make sure to check. As a businessperson you should probably have an accountant to do at least some of that anyway, but remember: if it goes wrong, it's the directors and secretary who are taken to court, not the accountants. It's your responsibility to make sure it is done correctly.
The Companies House website is a good source of information for all of this, and don't forget to check the Inland Revenue to see what expenses you can claim back too. Have fun, but don't forget your fiduciary duties!