If you have aspirations of running a successful business, you need to know how to take the crucial first step – actually setting it up.

Unlike self-employment as a sole trader, launching your own business means having to incorporate it as a legal entity. It’s a really exciting step, finally taking that long-planned business idea and turning it into a distinct ‘thing’ in the eyes of the law and your potential customers or clients.

Starting a business here in the UK is popular because it’s relatively straightforward to get set up and begin trading. Our country boasts some of the best support for new businesses in the world, and HMRC offers tax incentives via allowable expenses that make running your own business even more attractive. 

Though the steps and terms involved might seem daunting, it’s actually quite simple to get your business underway. In this guide, we’ll cover everything you need to know about incorporation and how it works. 

Here at Crunch, we love supporting new business owners, so make sure you head over to our limited company accounting page to learn more about how we can help. 

Understanding company incorporation in the UK

What does incorporating a company mean? 

Incorporation describes registering your new company as a separate ‘corporation’ – an entity that can have its own assets, enter into contracts and accrue debt. All of these are held against the company itself, rather than against the shareholders. 

The most obvious reason to incorporate a business is to get limited liability protection – which means your personal assets are not at risk if your company falls into debt and incurs financial penalties. If you own a home or have savings, this protection can be invaluable. 

When you incorporate a business, you’ll need to choose a business structure. We cover that topic in-depth further in this guide. For most people, however, a private limited company (LTD) is the best choice. 

Regardless of your chosen structure, the act of incorporating a business as a separate entity carries some clear pros and cons you need to be aware of. 

The advantages and disadvantages of incorporating a business

Advantages

• Limited liability: One of the biggest advantages of incorporating is the protection it offers to owners. Shareholders are not personally responsible for the company’s debts or legal liabilities, providing a layer of security for personal assets.
• Credibility: If your business is a registered entity, it will naturally be perceived as being more credible and trustworthy than a sole trader. In some cases, your potential clients may only want to work with other limited businesses.
• Tax benefits: Though limited companies have more complex tax reporting requirements compared to sole traders, they also have access to more incentives and exemptions that can help you offset tax and increase profits. 
• Investment: If you need to raise capital to fund business growth, you’ll have an easier time of it if your business is incorporated. If you create a limited company, you can sell shares to private investors to raise money. If you want to sell shares publicly, you’ll need to incorporate a PLC. 

Disadvantages

• Heavier admin burden: If you incorporate a company, you’ll need to deal with more administrative responsibilities than you would as a sole trader. You’ll need to keep up-to-date business records and file annual accounts for the business separately from your personal Self Assessment. 
• Lack of privacy: One of the downsides to your business becoming an officially recognised entity is that lots of documentation becomes public. Anyone can find your business via Companies House and access any documents you’ve filed – meaning they can see important financial data such as your profits or bank balance. 
• Capital restrictions: Once you incorporate a company, any money it earns stays with the business rather than you. You’ll need an accountant to help you work out how to extract the money in a tax-efficient way. The most common option is to take a salary from the business, topped up by additional payments called ‘dividends’. 

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Choosing the right business structure

When you decide to form a business, you’ll need to choose a legally recognised structure. This may sound complex, but there’s one option that is almost always going to be the best choice for the vast majority of new companies. 

The types of business you can form include:

Private Limited Company (LTD)

This is a type of business where all of the shares are privately owned and liability is limited to your share capital. A private business can have multiple shareholders and must comply with HMRC rules around annual accounts and confirmation statements. 

Almost 95% of formations in 2023 were for LTD companies, clearly demonstrating that it’s the right choice for most people. 

Public Limited Company (PLC)

If you’ve got dreams of selling big on the stock market, you’ll need to form a PLC – but you’ll need £50,000 in share capital to do so. Shares can be sold to the public and liability is up to the amount a shareholder invests. 

Compared to LTD companies, a PLC faces far stricter regulatory requirements and auditing rules. If we’re being honest, we’re only mentioning them in this guide for the sake of information – nobody new to owning a business starts with a PLC. 

Limited Liability Partnership (LLP)

If you want to set up a business with someone else, you could start a partnership. A standard partnership doesn’t require any incorporation – but it doesn’t offer any liability protection. To incorporate a partnership, you’ll instead set up a limited liability partnership, or LLP. 

Community Interest Company (CIC)

If you’re setting up a business classed as a social enterprise that is designed to benefit your community, you could aim to incorporate it as a CIC. The rules governing CICs are strict and limit the amount you can pay to shareholders. You’ll also need to have your application approved by the CIC regulator. 

The obvious choice 

As you can probably see from the options we’ve covered, private limited companies are the most common and logical route for almost everyone incorporating a business for the first time. 

Registering as a LTD company helps protect your personal assets, establishes your brand as an independent entity and allows you to dive into the world of business ownership. 

With all of that in mind, it’s time to incorporate…

Preparing for incorporation

Getting ready for incorporation is a case of following these key steps: 

1. Selecting a unique company name

Every business needs a memorable name. In the UK, no registered business can have the same name as any other – so it’s important that you look up potential names on Companies House first before you get too excited about any potential ideas. 

If you try to cheat the system with a name that is only slightly different from an existing name, the owner of the other business can complain, and Companies House might force you to change it.  

Some other naming rules to be aware of include:

• Don’t use any words that could be deemed as being offensive.
• When incorporating a limited business, names must end in either limited or ltd.
• Avoid any words that suggest a connection with any government or local authorities. 

See the full guide to naming rules on this Government page. 

2. Getting a registered office address

To legally establish a company, you need an office address where official correspondence can be sent. It must be an address that relates to a physical location in the UK that is on the public record. 

If you intend to run your business from home, you can use your home address – but only if you own the home and your mortgage provider permits it. In most cases, new business owners register with a virtual office instead. We recommend checking out our article which covers the requirements of a registered office if you’re unsure. 

Use a formation agent’s address

If privacy is a concern, you can use a company formation agent’s address as your registered office. Learn more about Company Formation services with Crunch. 

3. Appointing company officers

For a new incorporation, you’ll need at least one director who is responsible for the company’s day-to-day activities. Directors usually hold shares in a business, but they can also be appointed by shareholders to manage the operational and financial elements of running the company. 

For more new incorporations, you’ll be the sole shareholder and director. A director must oversee the business and ensure it is run in accordance with the statutory and management duties outlined by the Companies Act 2006. 

The Act is a legal document and isn’t to be taken lightly, but we can still give a rough summary of what it entails to help you know what you’re getting into.

In short, a director’s duties include:

• To promote the success of the business and act within the powers granted by the articles of association (more on that shortly). 
• To use independent judgement when making decisions and to act with care, skill and diligence at all times. 
• To avoid or declare any conflicts of interest. 
• To avoid the acceptance of benefits from third parties or using their position to make private profits.
• To carry out general management duties such as maintaining company and accounting records, filing annual accounts, paying corporation tax and other liabilities and complying with employment law if you have employees. 

Almost anyone can be a company director – you just need to be 16 or older and not have any discharged bankruptcies or active disqualifications. Anyone you appoint as a company auditor can’t be a director, either. 

Do you need a company secretary?

All of the duties facing a director can quickly mount up. In some cases, you can appoint a company secretary to help you with these duties – though the ultimate legal liability will always fall back to the director. 

4. Understanding shares

Whenever you incorporate a company, you’ll need to decide how to split share capital. A business consists of an amount of “shares” that dictate how the company’s capital is divided. 

When you issue shares, you need to decide how many you issue and how much they are worth. The most common format is to issue 100 shares valued at £1 each – which means you can either allocate 100 to yourself as a sole director, or split them between yourself and other owners. There are other ways to split shares, such as issuing a single share to one owner, but 100 at £1 each is common practice and gives you more flexibility if you change things in the future. 

Remember that because of limited liability, you will be liable for business debt up to the value of your shares – so don’t make them too valuable or you might be forced into a challenging financial situation if your business goes into debt.

5. Creating memorandum and articles of association

When you incorporate a company, you need to provide a memorandum and articles of association. 

These two documents are:

• A ‘memorandum of association’ - a statement agreeing to form the company, signed by all shareholders. 
• ‘Articles of association’ - written rules about running the company agreed upon by the shareholders or guarantors, directors and the company secretary

These documents sound official and intimidating – but they’re really just a relatively minor box-ticking exercise when you’re setting up your business because the GOV.UK website takes care of the memorandum as part of your application. The government also provides a set of standard articles of association, known as ‘model articles, that you can use without having to come up with your own. 

6. Selecting a SIC code

The Standard Industrial Classification, or SIC code, for your business identifies what it does in the eyes of Companies House and HMRC. You’ll need to head to the full list on Companies House and find the code that most closely matches your intended business activities. 

There are 21 different categories and over 600 codes to choose from, so make sure you’re confident in which code best applies to your brand before you register. 

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The incorporation process: register your new business

If you’ve followed this guide so far, you’ll now have everything you need, and you’ll be ready to incorporate your business. The process is fairly straightforward, especially if you want to do it online. 

1. Make sure you’ve read everything we’ve covered above so you know what you need during registration. 
2. Visit this GOV.UK website to begin registering your company online. 
3. You’ll need to either log in to an existing Government Gateway ID account or create a new one. 
4. Once logged in, follow the steps on each page to complete your registration. You’ll need to provide a company name, registered office address, name your company directors, allocate share capital and complete the memorandum and articles of association. (As mentioned earlier, registering online means you can complete both the memorandum and articles of association as part of the process.)
5. When you finish, you’ll receive a confirmation within 24 hours unless there are problems with your application. 

If you don’t want to register online, you’ll need to fill out an IN01 form and complete the memorandum and articles of association ahead of time so you can send them with your form. 

Alternatively, you can use a Company Formation agent to set up all of this on your behalf. This is perfect if you want to make sure you get everything right and don’t want to handle the hassle or responsibilities of the incorporation process. 

How much does it cost to incorporate a company in the UK?

Worried about the cost of starting a business? You don’t need to be – it’s actually surprisingly cheap to start a business in the UK. The cost of registering your business for the first time is relatively minimal, with online applications costing £50 compared to £71 by post. 

The cost of registration is only one financial element to consider when you’re just getting started. See our full guide to the costs of setting up a business to learn more. 

Updating business information 

Companies House contains a full register of all incorporated businesses in the UK. If you need to change any important details related to your business, you’ll need to inform Companies House to have the changes approved and the record updated. 

You’ll need to tell them if you change:

• Anything about any of the directors or company secretaries, including new appointments or a change to personal details (such as if you change your name when you get married). 
• The registered company name or address.
• Your accounting reference date.
• Any share adjustments or new issues of shares.
• Begin any new mortgages or any mortgages are paid off.

It’s easy to inform Companies House via this online portal, and in most cases, your changes will go through as soon as possible. 

If you’re changing any details to your business’ contact details or you appoint an accountant or tax advisor, you’ll also need to inform HMRC. 

Launch a business the right way with Crunch

Now that you’ve finished reading this guide, you’ll know everything you need to know about incorporating a business in the UK and can get started as soon as you’re ready.

Remember that incorporation is just the first step on a long journey. To launch and grow a business, you need to carefully track your finances and be smart about your tax obligations. Rather than paying for a traditional accountancy service, why not embrace the flexibility and ease-of-use of digital accountancy with Crunch? 

We provide a limited company accounting service that helps new businesses grow into successful brands. From taking care of your director’s accounting duties to providing proactive advice, you can leverage everything you would from a standard accountancy partner at a fraction of the cost. 

Visit our accounting for limited companies page to get your business started the right way.