What is company formation? How to start your company in 7 easy steps

2023 07 26

Company formation is an exciting but complicated procedure that requires critical thinking and many legal requirements.

In Europe, the industry is quite competitive and profitable - dozens of tech unicorns (firms valued at over a billion dollars) are on the continent. However, while setting up a company in Europe, you can encounter various issues in money management, balancing growth and quality, idea validation, raising capital, etc.

This blog post will guide you through the seven basic processes for company formation. It will equip you with the expertise and tools you need to complete the company formation process and get your firm off to a good start, whether you are an entrepreneur, an independent contractor, or a small business owner.

What is the meaning of company formation?

Company formation refers to the steps involved in establishing a new enterprise identified as an individual legal entity from its founders or shareholders. This new enterprise could be a partnership, a corporation, a limited liability company (LLC), or other business structures.

Company formation requires filing legal papers and paying the necessary fees to register the establishment with corresponding government agencies. Such legal documents to be submitted include articles of organisation which highlight the company’s mission, the structure of ownership, and other critical elements.

Once a business owner forms a company, it can start to function with its rights and responsibilities. Consequently, such an establishment can sue and be sued, join contracts, and own assets and liabilities.

Company formation: UK’s most common types of establishments

There are various types of companies available in the United Kingdom. The type of company you can set up depends on the business requirements and needs.

These are the commonest types of establishments in the UK:

• Entrepreneurship: This kind of business involves a sole trader or an entrepreneur. An entrepreneur is self-employed and runs the company as an entity. A sole trader holds all responsibilities in the company.

• Partnership: Here, two or more people or firms come together to set up a company. Each partner in such a company bears its profits and losses. The partners also work together to manage the company.

• Limited Liability Partnership (LLP): This type of startup is similar to a partnership but offers its members more security. In an LLP, the startup is a separate legal entity, and partners are only responsible for debt incurred up to their investments.

• Private Limited Company (Ltd): In this type of establishment, business owners are not individually responsible for the debts incurred in running the business. There must be at least one director and one shareholder. Its executives can also authorise shares to raise funds to run the company.

• Public Limited Company (PLC): This type of company operates similarly to a private limited company. The difference is that a PLC can sell its shares to the public. Public limited companies also have stricter regulatory and reporting obligations.

• Community Interest Company (CIC): A community interest company is a limited company specifically for social organisations that want to disburse their proceeds to the community. Such companies must have a social purpose and use their earnings to develop the community.

The most popular type of establishment in the United Kingdom is a private limited company (Ltd). Also known as limited liability companies, private limited companies are incorporated businesses that are separate legal institutions from their owners. Small business owners and entrepreneurs often prefer these companies. This preference is because of their limited liability protection, managerial and ownership flexibility, and ease of acquiring funds.

The magnitude of their investment in the corporation restricts the liability of shareholders in a private limited company. Hence, shareholders’ personal assets are unaffected when the company encounters setbacks or failures. Limited liability companies in the UK must have at least one director overseeing the company’s events and one shareholder.

A publicly traded stock exchange cannot list the shares of a limited liability company. The corporation is required to file yearly financial reports with Companies House, the UK government authority in charge of keeping the official company registration.

What is Companies House?

Companies House is an executive agency of the Department for Business, Energy, and Industrial Strategy (BEIS). It receives and keeps information on all UK-registered firms, including executives, shareholders, and yearly accounting records. This information is open to the world and available on the Companies House website.

Companies House is responsible for reviewing and accepting applications for company creation, changing company information such as the organisation’s name, corporate headquarters address, and director data, and handling the company registers.

Companies House is critical to the UK’s corporate landscape because it ensures accountability and openness in the company formation process and makes current and accurate data available to the public. This information aids in the promotion of competition, the support of economic progress, and the prevention of fraudulent conduct.

Steps to company formation in UK

These are the main stages associated with the company formation procedure in the United Kingdom:

1. Select a name:

Your proposed company name must be unique and not already recorded with Companies House. A general rule is that your business name should not include delicate and offensive words or phrases.

2. Select the business type:

Choose the type of company you wish to run.

3. Designate directors and shareholders:

As a company owner, you must select at least one director in charge of the company. There must also be at least one shareholder who would own the establishment.

4. Formulate the enterprise’s articles of incorporation:

You must design your company’s articles of incorporation, which talk about the establishment’s rules. The articles of association also outline the responsibilities of the directors and shareholders.

5. Draw up your company’s memorandum of association:

The Memorandum of Association is an official document that lays out the fundamental aspects of a company’s constitution, such as its name, its official address, and the goals and objectives for which the business is founded. The memorandum of association and the articles of organisation constitute the company’s constitution and control of its functions. It is vital paperwork that a business owner must meticulously create and adequately submit to Companies House.

6. Enlist your company with Companies House:

Register your company with the government agency by filing the necessary documents and paying the company registration fee.

7. Acquire all required licenses or permits:

Depending on the company’s nature of business, you may need to acquire some licenses and permits.

After completing the preceding stages and registering with Companies House, the firm can begin trading and acting as an independent legal entity. It must observe every regulation and law to guarantee that the organisation runs inside the law.

When founding a corporation in the UK, it is best to seek professional help.

Why is a company formed?

A company is founded to supply products or services to consumers, produce money for its owners or shareholders, and provide employment opportunities to workers.

• Limited liability: One of the main drives for company formation is to limit the personal responsibility of its shareholders. By forming an autonomous legal entity, the company’s proprietors usually are not personally liable for its financial obligations and debts over their investment.

• Capital: A corporation can raise capital by selling stock to investors or obtaining funding from banks or other lenders. This move enables the organisation to fund its day-to-day activities and invest in prospects for expansion.

• Business continuity: This refers to the ability of a company to continue operating even if one or more of its shareholders leave or die. The company’s operations can continue uninterrupted if sold or handed to new owners.

• Tax advantages: Based on the country or region, businesses may be eligible for tax advantages such as deductions for company expenses, lower corporation tax rates, or tax rebates for research and development operations.

• Brand recognition: A corporation can develop a brand image and reputation that distinguishes it from competitors and fosters consumer loyalty.

• Organisational structure: A company’s structure provides a formal framework for organising and administering its operations, such as decision-making processes, financial management, and human resources. It might help to guarantee that the company runs efficiently and successfully.

Company formation can bring various benefits that assure its long-term success and sustainability. Prospective business owners should, however, thoroughly evaluate the regulatory, monetary, and logistical ramifications of company formation before making a decision.

Conclusion

You can set your startup up for profitability and avoid typical mistakes by adhering to these seven simple steps for company creation.

Consult Demire to prepare your business strategy and select the appropriate legal framework. Our company formation services are some of the best in the industry. Contact us at +370 5 208 0880 so you can transform your dream of becoming an entrepreneur into a thriving business.

What is company formation? How to start your company in 7 easy steps