Carbon’s Corporate and Commercial Partner, Robert Flint guides you through some of the key steps you need to take at the very early stages of starting up your business. If you’d like to have a (free) chat with Rob about any of the points below he’d love to help.
Every story starts at the beginning, right?
Not if you’re founding a business. That starts with a vision of where you want to take your idea, in other words, your story starts at the end. What’s your main goal? What do you need to achieve it?
Your business plan.
If you’re reading this you already have a business idea you think can make it in the market. The first thing you need to do therefore is put together your business plan. It’s a good idea to try to define your objectives along the way to achieving your goal. Whether you want to make the world a better place or to become a millionaire in five years’ time (or both) you should work backwards from your goal, thinking about everything you need to do to get there. This will shape all the decisions you make early on.
The Prince’s Trust does a good pro-forma business plan you can start with, which is available here.
Your business name.
It’s the first thing people will ask you when you’re starting out; it’s the word(s) people will put into search engines; and it’s the word(s) you’ll have to sell to investors. So, no pressure then. It’s entirely up to you, but the name:
- cannot have the same name as another company, so search the Companies House Register to check. Also consider that some words and symbols are considered to be the same For example Make £££ Limited may be considered the same as Make Pounds Limited;
- cannot contain certain restricted or sensitive words; some words will require approval from the Government or a regulatory body – for example using the word ‘English’ or ‘Banking’ would require approval;
- cannot imply a connection with a public authority; or
- cannot be offensive or potentially constitute a criminal offence.
You can check out the Government’s guidance on company names here.
You should also try to ensure that your company’s name does not infringe someone else’s intellectual property. Google your proposed name to see if someone else is using it, even if it’s not the name of a company at Companies House. You should also check the Trade Marks Registry for registered marks similar to your proposed name.
You may decide that you want to trade under a different name to the name your company is registered with. That’s fine, just make sure that on official correspondence, invoices and somewhere on your website it’s clear that “X is the trading name of Y Limited.”
Whether you’re looking to attract investment, hoping to grow and sell your business, or float on the stock market, you’ll probably be using a private company limited by shares to carry on your business.
The work-horse of the economy, private limited companies offer the key advantage of being able to scale up easily and in a way that your creditors, clients and investors can trust. You can’t float a sole-trader or a partnership on the stock market, after all. A few important things to keep in mind about companies:
- You can easily sell shares to investors, who are used to buying shares in start ups and gaining tax relief on those investments.
- Your company pays corporation tax and you pay income tax, but a company may well offer tax advantages overall.
- On the other hand, the extra admin means you may need to instruct accountants to deal with expenses, corporation tax, PAYE and VAT unless you feel confident in dealing with these yourself.
- It’s also important to note that if your company makes a loss, this cannot be offset against your other personal income.
- The company is a separate legal entity from you as shareholder or director, so your liability is limited to whatever assets you have put into the company (i.e. the money you pay for shares). The quid pro quo for limited liability is that your accounts are public, as your creditors need to know you’re going to be able to pay back their money.
- Before lending to smaller companies, however, banks usually also require personal guarantees from directors and shareholders which circumvent this limited liability.
- If you’re a director you’ll also have legal duties to the company and society at large, carrying potentially criminal penalties.
There are other types of structure you can use for your business. Professional firms, for examples, are often Limited Liability Partnerships, while micro businesses are often sole-traders or partnerships. There are also lots of different types of companies, from private companies limited by shares, companies limited by guarantee, public limited companies, unlimited companies and companies listed on the stock exchange.
This guide focuses on private limited companies as the most common and appropriate entity for start-ups, but if you would like to discuss the other options available, please get in touch for a free conversation.
How to incorporate your company.
For those who have not already done so, you’ll be pleased to know that incorporating your company is relatively simple and cheap (at £12) to do, and for most businesses the process can be done entirely online. It’s only after incorporation that things get a bit trickier.
First of all, most businesses won’t need to pay an agent, accountant or lawyer to incorporate your company and you can go straight to the Government’s website. The steps are clearly set out and explained, just go to the site to get started.
When incorporating the Company, you will be asked if the directors consent to act. To give this consent for each director, you will need to provide three of the following details: the director’s place of birth, telephone number, national insurance number, passport number, mother’s maiden name, eye colour or father’s first forename
If you have already appointed an accountant, however, they should be able to help you with your incorporation and deal with the Company’s tax affairs at the same time.
If your business is a bit more complicated or you want bespoke Articles of Association, you’ll need a solicitor to help, so please get in touch for a free chat.
Persons with Significant Control (“PSC”) Regime.
One point of the incorporation process which might appear more complicated is the “PSC” regime. This regime was introduced by the Government to ensure that the ultimate ownership and control of companies is transparent to help reduce money laundering and tax evasion.
For most start-ups, the person or persons with significant control will be anyone with more than 25% of the shares or voting rights in the company. For example, if there are two founding shareholders, each with 50% of the shares and votes, you’ll have two persons with significant control. If you have four founding shareholders each with 25% of the shares and votes, you’re likely to have no persons with significant control (unless, in practice, one of the shareholders exercises significant influence or control). More detail on the PSC regime is available in the Government’s PSC guidance.
Memorandum of Association.
The incorporation process also refers to the Memorandum of Association. Historically, a company has needed shareholders to sign a ‘memorandum of association’ to show that they agree to form a company. When going through the process of incorporating a company online, shareholders can now do this electronically.
Articles of Association.
Articles of Association or “articles” are the constitution of your company, essentially the contract between shareholders and the company, setting out the obligations between them. You can either incorporate a company with model articles (i.e. the pro-forma articles that the Government provides), available here, or bespoke articles drafted by a solicitor.
If you would like us to draft bespoke articles (for example if you or a potential investor would like more than one class of share), please get in touch for a free initial discussion. If you are using bespoke articles you cannot use the online incorporation procedure and must either use an incorporation agent or incorporate by post.
For most start-ups, where future revenue is uncertain and you don’t want to incur lots of costs up-front, online incorporation with the model articles makes the most sense. The model articles are commonly used and will be suitable in many circumstances. And if you want to change the articles later, you can do so. Model articles also comply with SEIS or EIS investment requirements.
Registering for Corporation Tax.
When you incorporate your company online you will be required to register for a unique taxpayer reference number for corporation tax purposes. As companies are separate legal entities, they pay corporation tax which is separate to any taxes that shareholders or directors pay as individuals. Companies therefore need a unique taxpayer reference number in the same way that an individual registered for self-assessment does. The incorporation process will prompt you to create a Government Gateway account, though the services are gradually being moved from the existing site.
If you have an accountant, they should be able to assist you with deciding whether to register for VAT.
If you’re a new company, you must register for VAT if:
- you provide services which are exempt from VAT;
- your VAT taxable turnover goes over £85,000 (the ‘threshold’), or you know that it will; or
- if you’re based outside the UK, as soon as you supply any goods or services to the UK.
You may want register the business for VAT even if you don’t have to, for example if your turnover is £150,000 or less and you want to take advantage of the Government’s Flat Rate Scheme which allows your business to keep the difference between the VAT you receive from your clients and customers and the VAT you pay to the Government.
If you do not have an accountant, most start-ups can start the registration process themselves using the Government’s website here. You’ll need to already have incorporated your company and received your company’s unique taxpayer reference number.
“Pay as you earn” or PAYE is the way businesses are required to pay tax and national insurance when employing their employees and workers.
Even if your business has only one director/employee (i.e. you) you will need to register for PAYE before the first payday, usually taking up to 5 days to receive your employer PAYE reference number. You cannot register more than 2 months before you start paying people. Most businesses will be able to register online here.
Setting up a business bank account.
After you’ve incorporated your company you’ll need a business bank account to ensure you can get paid and also pay your costs and taxes.
In the UK this is relatively simple to do. It’s common for banks to charge fees for business accounts so look for the best deals online, you should be able to get the first six months to a year free, depending on the size of the company and the number of initial directors.
Bank requirements vary but you are likely to need some or all of the following:
- form of photographic identification;
- proof of address; and
- proof you’re on the electoral roll.
Once you’ve incorporated your company, you’ll be given a unique company number (note that this is not the same as your corporation tax number) and you’ll be able to see your company online by searching the Companies House Register. This is public and helps potential creditors, suppliers, clients and investors to check that you are who you say you are.
When you incorporate your company, you should apply for ‘web-filing’, which allows you to file documents with Companies House online. This is much simpler and cheaper than filing by post. Once you have applied for web-filing, Companies House will send you an authentication code by post which you should keep safe as you will need this for future filings.
Filings which need to be made at Companies House include the appointment and resignation of directors, allotment of shares and any special resolutions passed by the Company.
It’s important to note that while Companies House maintains the Companies House Register, this register is different to your ‘company registers’. Put simply:
- The Company’s House Register is the public record which you as director or secretary are responsible for maintaining. In most cases, not filing a document at Companies House will not affect the validity of such document. For example, failure to file the appointment of a director will not mean that the director has not been appointed. There are likely, however, to be fines and offences if you do not make your filings on time.
- The company registers are (unless you elect otherwise) company documents which must be stored at your Company’s registered office and include the register of members, register of transfers, register of debentures, register of directors, register of company secretaries. It is important to keep these registers up to date, particularly the register of members, which records who your shareholders are. The register of members is not published online, but legally speaking this is one of the most important documents in relation to your company: a shareholder is not legally a shareholder until their name is entered into the register of members. If this is not maintained it can have serious consequences for the Company and the shareholders.
Your first board meeting.
Soon after you’ve incorporated your company you should hold your first board meeting (a meeting of the directors) to make sure all the formalities are dealt with. For example, you’ll need to pass various board resolutions, decide who will be the chairman of the board, enter into director service contracts, appoint advisers such as accountants or lawyers, approve the subscribers to the memorandum of association as the first shareholders of the company. Board meetings are useful ways of ensuring that all the directors agree on the way forward, and keeping a board minute will ensure that you have a record of what has been agreed and who has been deputed to do it.
You should also arrange for the company to receive the subscription monies (i.e. the money that the shareholders pay for their shares). Initially this is likely to be a cash payment as the business account might not be set up by the time you hold your first board meeting. When the account is set up, the subscription monies should be deposited in the company’s bank account.
You may also need to hold a general meeting (a meeting of the shareholders) to pass certain resolutions.
Assuming you’re happy using the model articles for your company, one of the first documents that small companies want help with is the Shareholders’ Agreement. As the name suggests, this is an agreement between shareholders about how they will behave in relation to the company. These mirror the articles but are private documents, so you can keep certain arrangements confidential. For example, you can include provisions:
- determining how the chairman of the board will be appointed;
- restricting what shareholders can do after they leave the company;
- how and when shareholders can transfer or sell shares and how shares will be valued;
- what issues require the shareholders to agree unanimously; and
- determining what happens on death of a shareholder.
If you would like help drafting a shareholders’ agreement, please get in touch for a free conversation.
Finally, a word on the appointment of advisers. As you may have guessed on reading this guide, your most important adviser when incorporating your company is often not actually your solicitor but… your accountant!
Many accountants offer very reasonable rates to look after your accounts, tax affairs and company books. The sector is competitive so before appointing an accountant it’s important to shop around. Look at whether they are a ‘chartered’ accountant, their fees, their experience in your sector and what is included in their package.
One advantage of having a good accountant on board is that your records and tax affairs should be in order, helping keep costs down when you do decide to instruct solicitors.
We can help you.
At Carbon, we offer quality advice with flexible fee structures to suit your business. We can provide fixed fee quotes for specific pieces of work, or if you’d rather have us on hand for general queries, we can also work on a retainer basis at competitive rates.
For a free initial discussion, please get in touch with me at firstname.lastname@example.org or call me for a chat on 029 2167 1990.