Incorporating my Company in the UK; no lawyer; no accountant.
It’s official: I am now the director and sole shareholder of Trevor Technology Limited.
Trevor is now officially its own legal entity, registered in England. It is a private limited company (like an LLC in the US) with its own bank account, and most importantly, its own ability to do business: buying and selling products and services.
Incorporating a company in the UK was so much easier, faster and cheaper than I ever imagined!
I’ll mention, later, a little bit about why I incorporated Trevor (as opposed to setting up as a sole trader), but the main reason I wanted to blog about this was: incorporating a company in the UK was so much easier, faster and cheaper than I ever imagined!
I had heard a lot of good things about how the UK’s government had been fighting bureaucracy over the last few years to encourage entrepreneurship. But I never imagined it would actually be this easy.
So, this was the process (total time: ~30 mins):
- Choose a company name (and make sure it doesn’t clash with one already registered https://www.gov.uk/choose-company-name)
- Register with Companies House (https://www.gov.uk/register-a-company-online).
- cost: £15
- used my UK home address
- registered myself as the sole company Director
- used my full name (apparently a classic mistake is to miss out your middle name on the form — or shorten your first name)
- registered myself as the sole Share Holder (100 shares)
- agreed to the default Memorandum of Association (https://www.gov.uk/limited-company-formation/memorandum-and-articles-of-association)
- agreed to the model Articles of Association (https://www.gov.uk/guidance/model-articles-of-association-for-limited-companies)
- issued 100 Ordinary shares at £1 each (https://www.gov.uk/limited-company-formation/shareholders)
3. Wait for company to be incorporated (24–48 hours)
And it really was that easy.
Now what’s the catch?
Seemingly, there is no catch…
I had a load of worries before I did this:
- is incorporation expensive?
- do I need a lawyer?
- do I need an accountant?
- what about Corporation Tax?
- what about VAT?
- any other business fees?
- how do I put money into the business?
So, I did a bunch of reading, and asked a bunch of people, but… Disclaimer: I am not legally trained in law or accounting, and you should probably seek the professional advice of an accountant and/or a lawyer.
Is incorporation expensive? Not at all: £15, all in. Even the share capital (I chose £100) doesn’t have to be paid up-front; it’s just what you’re liable for if the company goes bust (hence “limited liability”).
Do I need a lawyer? I have not used one. All the documents (Memorandum of Association and Articles of Association) come with sensible defaults (or so it seems).
Do I need an accountant? I was very fortunate to have two accountants sit down with me for an initial free session (I guess, in the hope that they’ll get my business in the future). My answers to the remaining questions comes from (my interpretation) of their answers.
The answer to whether you need an accountant (in the first year as a startup) is very much dependent on your type of business. My judgement call, based on the fact that I expect to have very simple incomings and outgoings (no salaries to pay and no significant benefits to be gained by clever tax loopholes), is that no I don’t.
What I will need, however, is to be rather anal about keeping track of everything and anything I spend (including keeping digital copies of all my receipts and invoices) in a big Excel spreadsheet. This is because, while I won’t necessarily need to do my accounts in year one (to be explained below), I will in year two — and my future accountant will probably have a heart attack if I haven’t (and charge me a fortune as a consequence).
What about Corporation Tax? So, the nice thing is that you don’t technically have to register for Corporation Tax until (3 months after) you start doing business (https://www.gov.uk/limited-company-formation/set-up-your-company-for-corporation-tax). What this means is that, even though your company is incorporated, you don’t have to start your accounting year until you start doing anything (e.g. buying, selling, renting or employing someone). I.e. if, like me, there’s a significant product development stage at the beginning, you can potentially defer starting your accounting year. And even better: you don’t have to file your first year accounts until 9 months after your accounting year finishes (hence no need for an accountant in year 1).
My interpretation: I don’t need an accountant for the first 21 months of trading (unless Trevor is outrageously successful). Hurrah! (but I do need to register for corporation tax as soon as I start trading).
What about VAT? Value-Added-Tax (VAT) is a tax you pay on any products or services you buy. As a business you can usually reclaim any VAT you pay (https://www.gov.uk/reclaim-vat), however, until you’re earning more than £82k in revenues, you don’t actually legally need to register for VAT. One of the negative consequences of being registered is that you suddenly have to charge VAT to all your customers too, and you have to pass on that VAT to HMRC every 3 months (https://www.kashflow.com/should-i-register-for-vat/). If nothing else, your bureaucracy has suddenly got a lot more complicated.
My take: as a startup, unless the bother is worth the money you’ll reclaim, then it probably isn’t worth it. Either way: keep track of all your outgoings (and get a VAT receipt from everybody you buy from) and then speak to your (future) accountant (in a year’s time).
Any other business fees? So, apart from obvious costs (e.g. office space, services, etc.) the only potential hidden cost I’m aware of is Business Banking charges. As a private limited company (which is its own legal entity) Trevor needs to have its own business bank account. Such accounts aren’t free, unlike most personal bank accounts, but the good news is that most UK banks will give you the first two years free of charge (in the hope that you’ll stay with them for the long haul). One note though: transactions, such as paying for things in foreign currency (I will be paying for various services in USD/EUR) may have a charge linked to them. My bank will charge me 2.95% on each transaction (urggh!).
How do I put money into the business? Simples: you just transfer money from your personal account into the business account; and then make a note of it in your Excel spreadsheet. This last part is important, because once your accountant gets to your books, they will put this down as a “Director’s loan”. It effectively means that the company owes you money, so if you later want to take money out of the company, you can do so tax free. Importantly though: your “Director’s loan” should never go into the negative (i.e. you shouldn’t owe the company money). If you want to take money out of the company, beyond the money you put in, then you should speak to your accountant (they may recommend paying yourself a dividend, or setting up a PAYE scheme).
So there you have it. Everything I learnt this week. Now, if you’re reading this, and you happen to be an accountant/lawyer; and you’re thinking “what nonsense!”. Please, please, do shout. I’d love to hear from you.
And, just to finish, my reasons for incorporating (as opposed to being a sole trader):
- as a company I only have to pay Corporation Tax (currently 20%) on my profits (not my revenue). Whereas as an individual I would pay 20–40% Income Tax (on my income), plus 10% National Insurance.
- I can reclaim my VAT (if I want to).
- I have limited liability; meaning that if the company gets into serious debt, I am not personally at risk of bankruptcy.
- if I want to raise money (e.g. as a loan or through Angel/VC) then having a company makes it easier (and protects the investor(s)).
- if I want to sell it one day, I can (because it is a “thing”).
- and, last but not least, I may have co-founders one day, and would like to be able to give them a “chunk of the cheese”.