How to set up a company?

This isn’t a comprehensive guide to setting up in any particular country. This is just generally a list of what’s involved when setting up an incorporated business entity.

 

1) Finding out if you actually need to open a company

 

Most businesses become incorporated for very few reasons, here are a few:

  1. The business is becoming very complex (processes, locations, products etc)
  2. The business is growing exponentially (revenue, costs and profits)
  3. The business needs more cash, and therefore more financing in the form of a loan or equity

Essentially, if your business is becoming more risky, or you yourself are risk-averse, then it makes sense to incorporate.

If you are a sole trader working as a professional consultant, and this is the norm in your industry, then it makes sense to stay as a sole trader.

If your online retail shop is adding more products, warehouses, and staff to it’s mix, and you need money to grow, then it’s time to incorporate so that if it all falls to pieces, you are only limited to the amount of share capital you invested in your business (and not all your personal assets).

 

2) Choosing a name

 

You can’t just name it anything you like – and the chances are that you will have to alter it somewhat to get the name you want. Remember though, your company name does not have to be the same as your ‘trading as’ name (business name registration name):

  • Check the rules for company names in your country
  • Google the name as a cursory check. You don’t want to compete with a business with more resources, even if you are both in completely different industries.
  • Check existing trade marks

 

3) Choosing directors/secretaries (the management team)

 

Every company needs a management board/team that is responsible for how the company behaves in its country/environment/industry.

As a shareholder, you are limited to the financial impact a business failure can have, but you are not limited in your responsibilities as a director. Remember that becoming a company director has many implications in law and you are directly responsibly for ensuring that the company complies in all respects (as a bare minimum – you also need a sense of ethics).

As a secretary, you are responsible for ensuring that the company meets all it’s official filing and reporting dates, as well as ensuring that any taxes due are paid (employment/social taxes, VAT, Corporation Tax etc)

 

4) Deciding on shareholding

 

In most cases, a minimum of one shareholder is needed (someone or something needs to own the company – it’s not a free radical!).

This owner does not have to be a person, it can be another company. This is commonly known as a ‘subsidiary’ company.

Most countries now have rules in place regarding control over the company. If a single shareholder has more than 51% they are usually known as the shareholder with significant control.

For shareholders with holdings between 20%-50%, they are known to have ‘significant influence’.

Every other shareholder (below 20%) are known as ‘minority’ holders.

So know this before giving away half your company for some cash/capital. You should always try to maintain as much control over your company as physically possible.

 

5) Preparing Company Documentation

Most documentation looks quite simple, but it’s really important that you get a solicitor or lawyer to look over it first. This is in your best interests!

Here are a few key documents that are normally required:

  • Company constitution (aka Articles of Association)
  • Memorandum of Association (in some company types)
  • Company Registration Fee (sometimes Notary fees are involved too)
  • Shareholder’s Agreement
  • Business Plan / Budget / Financial Projections (useful but not mandatory)

 

6) Checking what records you need to keep

 

When you are a director of a limited company, you must keep the following accounting records:

  • records about the company itself (directors, shareholders, office address etc)
  • financial and accounting records (purchases, sales, cash holding, taxes, payroll etc)

You can hire a professional (for example, an accountant) to help with your tax.

You can bet that most country’s tax authorities may check your records to make sure you’re paying the right amount of tax, so in the interest of preventing fines and time spent going through records, it’s best to get a professional to help.

Further info: 

Records about the company

  • directors, shareholders and company secretaries
  • the results of any shareholder votes and resolutions
  • promises (debentures) for the company to repay loans at a specific date in the future and who they must be paid back to
  • promises/indemnities the company makes for payments if something goes wrong and it’s the company’s own fault
  • official paperwork when someone buys shares in the company (share notes)
  • loans/mortgages secured against the company’s assets

You must tell Companies Registration Office if you keep the records somewhere other than the company’s registered office address.

 

Records of Ownership

Usually submitted once a year or if there is a significant change in shareholding, such as:

  • shareholder who now has more than 25% shares or voting rights in your company
  • major directors added or removed from the management team

You still need to keep a record if there are no people with significant control

 

Accounting records

You must keep accounting records that include:

  • all money received and spent by the company, including grants and payments from coronavirus support schemes
  • details of assets owned by the company
  • debts the company owes or is owed
  • stock the company owns at the end of the financial year
  • the stock inventory method you used to work out the stock figure
  • all goods bought and sold (receipts/invoices)
  • who you bought and sold them to and from (unless you run a retail business/stock for resale)

Most countries maintain the authority to fine, remove or imprison directors that do not keep adequate accounting records. More detailed info here.

Also ensure you know how long you need to keep important records, and if they can be kept electronically or physically. Usually though, it’s either one or the other – not a mix of the two.

Hurray! Now you can open your own company and get busy.

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Colin Sweetman, ACCA

Colin Sweetman, ACCA

Colin is a chartered certified accountant and founding director of First Accounts and FutureME, as well as a contributor on The Accounting Channel (Breakeven By Breakfast) and "Finance & The Common Good".