How to set up a limited company
Get the complete guide to setting up a limited company. We explain every step, from choosing a name and share structure...
Company formation is just the first of many interactions you’ll have with Companies House as your business grows. That’s why it’s so important to get your filings right from the start.
When you register your business with Companies House, you become its director and shareholder and as such you’re setting up the legal foundations of your company. Fudge things now, and it’ll be more effort to sort out later.
At SeedLegals, we have over 35,000 incorporated companies on our system. Every time we help a business with their funding round or share option scheme, we run a thorough background check on their Companies House filings to check everything’s correct and ready to go.
We’ve seen it all: the good, the bad and the ugly. In this post, we’ll share our experience to save you from making time-consuming mistakes.
What you need to know before registering your company
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For a step-by-step guide to company formation, see How to set up your limited company. In this post, we’re focusing on the most common mistakes we see in Companies House filings, how to avoid them and what to do instead.
When you incorporate your company on Companies House, you need to decide the type of shares to create and what rights they give the shareholder (over voting and dividends, for example).
At this early stage, your best move is to keep it simple and choose Ordinary shares. With Ordinary shares, all things are equal – the voting power shareholders get is proportional to their number of shares, and everything is clear.
Later on, as you begin to grant shares to employees and investors, you can get fancy with alphabet shares, non-voting shares, preference shares and the rest. For now, your priority should be laying the foundations for clear communication between founders and investors.
Occasionally, we see companies that have incorporated as a multi-level structure, with a holding company owning the shares in a subsidiary company. On the surface, that might seem like the better option – perhaps because of complex accounting reasons or to keep the IP under separate ownership.
But this kind of multi-level company structure almost always creates unexpected problems for the subsidiary company – especially when it comes to seeking investment.
First of all, you can’t qualify for SEIS or EIS investment as the subsidiary company. Under the schemes’ eligibility rules, only the holding company will be able to offer investors the opportunity to claim a tax break on their investment.
It might also raise red flags for investors – and a whole lot of expensive paperwork for your company. Investors want to be sure that the company they’re investing in (in this case, the subsidiary company) is valuable in itself. If there are questions about which entity actually owns the IP and the revenue streams, you’re making it much harder to justify backing your business.
We come across this misunderstanding from time to time. Some founders think that the cash they put into the business can count as SEIS/EIS investment, and that they’ll be eligible for the same rate of Income Tax relief as external investors.
Unfortunately, that’s not the case. To qualify for SEIS/EIS, an investor can’t have a ‘substantial interest’ in the company for a fixed period after incorporation. In this case, HMRC defines a substantial interest as holding a 30% stake or above in the company.
As part of the incorporation process, you need to decide how many initial shares you’ll create and assign a fixed value to them. The fixed value is called the nominal value of your shares, and after it’s decided at incorporation, it’s difficult to change.
It’s important to get the balance right between the number of shares you incorporate with and the nominal price you set for them. It impacts how much money you need to transfer to the company, and the price per share an investor will have to pay in a future funding round.
So, if you want to incorporate with a larger number of shares (more on that below), don’t set the nominal value at £1.
At your first funding round, you need to be able to tell investors that your share capital is properly paid up and registered. That could be a problem if you incorporated with 1,000,000 shares at a nominal value of £1 per share, and you don’t have £1M handy.
To keep it simple as you start out, we recommend incorporating with 100 ordinary shares, each with a nominal value of £0.01, so that your entire share capital equals £1.
Incorporate with an amount you can actually pay. That way, you won’t have to waste time later making corrective filings or confirmation statements.
At a bare minimum, you need to issue at least one share to each shareholder at incorporation. But it pays to give yourself more flexibility by creating a number of shares that results in a manageable price per share.
Then, before your first funding round, you can do a share split to turn those 100 shares into 100,000.
When setting up your company, you have the discretion to decide how many shares you incorporate with, but it’s good practice to set a manageable nominal value. Not only does this mean you’re able to pay these shares up when setting up the company, but you can do a share split later to keep investor percentages and the price per share manageable. For reference, we always recommend having at least 100,000 shares before taking on investment.
If you’re using SeedLegals for your share split or to transfer shares, it’s important to add each event in order and not to combine different share issuances. Make sure your IN01 incorporation aligns fully with the incorporation round you set up on the SeedLegals platform. It’s not easy to fix filings on Companies House. But we’re happy to help you get set up correctly to avoid problems down the line.
Rajiv Mansigani, Startup Associate,
At incorporation, every company needs to officially set out its legal framework, explaining how it’s managed and operated, the rights and responsibilities of the company’s directors and shareholders, as well as the rules for making decisions, holding meetings, and transferring shares. This document is called the Articles of Association.
When you register your company with SeedLegals and Tide, Companies House will give you a default set of articles called the Model Articles. That’s absolutely fine for the short term when your company is getting off the ground.
But the Model Articles have several limitations. In particular, these articles won’t include founder vesting, so what happens if one of your co-founders has 30% equity and quits after six months to get a ‘proper’ job and keeps all their equity? This could really damage your company and kill your ability to get funding at a later stage.
The Model Articles will also assume that all board decisions need to be unanimous. That can be a real problem if you have a disagreement and you need to make a decision quickly.
When you do a funding round with SeedLegals, we make it easy to create and adopt custom articles that put your company on a firmer footing for the future.
SeedLegals and Tide are the perfect partners to help you set up your company correctly from the very start. Together, we’ll help you:
To get started, book a free call with a SeedLegals expert.