Our 10 step guide to company formation
So here we are: it’s the first step of your business journey, and exciting times lie ahead. You’re not alone. However – each year, well over half a million Brits form their own companies, and the number of startups is steadily on the rise. But what exactly are the ins and outs of successfully starting up? How do you actually do it?
Whether it was through a flash of inspiration, or something you have been mulling over for some time, each new business starts with an idea — your idea. And while the thought of turning that concept into a reality might seem daunting at first, once you look at each of the essential elements step-by-step, the process of smooth company formation, and getting it off the ground, slowly comes together. To help you understand that process, here’s our 10-step guide outlining what it takes to transform a great idea into an up-and-coming enterprise.
1. Build on your business idea
So, you’ve got your idea firmly in your mind. Right now, your aim is to answer the big questions about it: the what, who, where, how, and why. If you can define what your business will actually look like and be like, combined with some essential fact-finding on the market you wish to enter, you can start to determine whether your idea is actually viable. In other words, is it just an idea, or is there a potential business behind it?
Firstly, you need to define the product or service you will be offering. For instance, if your vision is to sell organic cakes, how will you be selling them? Will it be via your own shop, by order through your website, or direct to existing local food outlets?
Next, consider who you will be selling to. In other words, is there a market for what you have to offer? Researching the market is crucial to find out whether your business idea already exists. For a brand new product, a Patents Office check is also advisable in order to avoid pouring lots of time and money into an idea, only to find that someone else has beaten you to it.
Throughout this early period of research, you should be able to build up a picture of where your business might fit alongside potential competitors. For instance, your locality might be well served by budget gyms, but is there a market crying out for yoga classes? You need to also price up what it will take to offer your proposed product or service. You can do this by making enquiries with suppliers, for example.
Right then, you’ve taken your original idea and converted it into the beginnings of a workable business plan. That plan will need to be fleshed out further later on; but right now, you are well on the way to making the idea a reality.
To find out more about business plans and the beginnings of company formations, our Help Centre will provide you with more information.
2. Choose a business name
Ok, business names. Let’s use the example of how a successful plumber or management consultant would name their business: the success of their business is often linked closely to their personal and individual reputation. Recognition is crucial, so in cases such as these, adopting a business name that doesn’t incorporate personal identity (such as The Bees Knees Plumbing instead of Joe Bloggs Plumbing) might cause you to lose that instant recognition factor.
Yet compare this to a new hip restaurant or creative business. Sheila’s Crafts might fail to sum up the spirit of your business, and neither is it likely to grab the attention of customers. These are two of the most important things to consider when choosing a business name.
If you are struggling with a name, online name generator tools can help in the inspiration stage, such as this one from Shopify. It also tells you whether the website domains for suggested business names are available (another crucial consideration for any business name).
You should also make sure that the name you choose is not likely to cause confusion and cases of mistaken identity with existing businesses. As a starting point, a Google search should reveal whether any businesses are trading under your proposed name. The Companies House WebCheck service will also tell you whether your favoured name is taken by another company.
For further help on finding out your perfect business name, head on over to our Help Centre.
3. Choose a business structure
New businesses are most often structured in one of two ways; as a sole trader or a limited company.
A sole trader is not necessarily a one-person business , however, as you can still take on employees. You are personally responsible for any losses incurred by your business, and likewise, all profits generated by the business are your own (after payment of income tax). If you are setting up the business with someone else, this is when a partnership arrangement might be required: whereby you and your partner(s) are personally responsible for your pre-agreed share of the business.
A limited company, by contrast, is treated as a separate legal ‘person’. Which means a company’s finances are separate from those of its owner. As such, subject to any personal guarantees you provide, conducting your business as a company can make it easier to protect your personal liability should the business suffer any financial difficulties.
Setting up a company gives you the ability to use the ‘Ltd’ or ‘Limited’ assignation after your business name. This can give a sense of stability and professionalism to your business — something that help to create a reassuring impression in the eyes of new customers.
If you’re wondering about company structures and their differing financial implications, then our definitive guide in the Help Centre will give you more information.
4. Form your company
Some business owners prefer to trade as a company right from the beginning, whereas others decide to switch from sole trader to company status as they grow.
Regardless of the structure you choose, you should consider how best to safeguard the identity of your business. If you’ve come up with the perfect name, you do not want someone else to register a company and start trading under your choice of name. No two companies can trade under the same name you see, which makes registering a company with the same name as your business at an early stage a sensible precautionary measure.
Registering a company is an inexpensive, straightforward process, and you can do it directly through The Formations Company, which is approved by Companies House.
Once you have registered your company, you can trade under it from the start — or you can choose to continue as a sole trader and maintain the company as dormant. A company can be kept dormant indefinitely; all that’s required to keep it going is the annual completion of dormant company accounts and a Confirmation Statement, along with an annual online filing fee of £13. Here, you are simply confirming that your company is not trading and has not been party to any transactions.
To understand a bit more about the legal side of the owning a business, check out our dedicated Help Centre category.
5. Organise your business premises
While some businesses require their own workshop, office, or another type of premises right from the start, many others actually start from home. When you form a company, you are required to specify a registered office address — this the official address of your company. Likewise, you are also required to have a designated service address where statutory mail (communications from HMRC and Companies House as well as formal communications from third parties) can be sent.
Displaying a residential address instantly gives away the fact that you are working from home, which might go against the professional image you are trying to portray. There’s also the issue of privacy; so far as the customers are concerned, you might want to keep business and home separated.
One way around this is through a registered office address facility. The Formations Company Registered Agent Address Service, you get to display a prestigious City of London address on your communications. All mail is forwarded onto you, while your personal address remains confidential.
6. Identify and build a presence in a niche space
When it comes to promoting your business, if you attempt to appeal to everyone, it becomes harder to make a lasting impression with any particular group. For up and coming businesses especially, a more sensible way forward is often to focus on tightly defined groups. That way, you can target your marketing efforts more successfully and strategically.
Start by considering the different types of customer who may be interested in your product or service. Instead of trying to appeal to all of them, are there certain categories that your competitors are not targeting specifically? Research these groups to see whether they present a large enough market to be worth aiming at, and look carefully at how they might be reached effectively. For example, when kicking off your marketing and communication efforts, you might want to start by looking at the social media platforms your audience uses, as well as the publications/blogs they might read.
For more information on forming a company in a niche space, our Help Centre contains all the information you need.
7. Marketing your brand
Your ‘brand’ represents your identity and how it’s perceived by the outside world. It tells customers who you are, what you do, what they can expect in terms of quality and service — and, importantly, what you stand for. Marketing is essentially what you do to get your message across to the right people, through the right platforms, and in the right way.
Using the same logo across your letterhead, website, and social media pages, for example, helps to make you instantly recognisable. But this is just the top layer of branding. To really build a solid brand, it’s vital to focus on your reputation by delivering great service and giving customers a positive experience.
From day one, the process of marketing your business begins when you encourage those first customers to leave a positive review and to recommend you to their friends. A website, for example, can be a fantastic tool for both branding and marketing. Through the content you include on it, you can showcase your products or services, provide customers with the information they need to know, pre-empt their questions, and build trust.
Social media, too, is an incredibly useful way of keeping up communications with existing customers, as well as attracting new ones.
You can find out more about various marketing techniques for your business in our Help Centre.
8. Secure funding for your business
Whether it’s an initial cash to get your business off the ground or a major investment to take it to the next level, most companies find themselves requiring outside financial input at some point. The thing to remember though is that securing funding involves convincing those who hold the purse strings that you are a ‘safe bet’.
Once again, your business plan is crucial for this: where you demonstrate what your business has achieved so far in terms of revenue and profit, as well as presenting evidence-backed assertions about how you expect your business to fare in the future. For further tips on how to present your business in the best possible light, our Help Centre will equip you with an understanding as to what investors look for.
The bank manager is not the only port of call for funds, however. You might, for instance, qualify for government help, so it’s worth checking the government’s finance and support search service. What’s more, if you have a promising business concept and a good track record so far, there’s also the possibility of getting angel investors or equity investors on board. Crowdfunding has become another firm favourite with startups: it’s a great way of raising both funds and awareness for your new business.
For more information on funding for your company, our funding section in the Help Centre will provide what you need.
9. Keep on top of your legal requirements
One of the first things you will need to do after starting your own business is to register as self-employed. Whichever business structure you choose, it’s vital to keep accurate accounts — not just so you can submit accurate information to HMRC — but also to keep personal track of cash flow. As a company director, you are required to keep on top of annual filing requirements; but this is something that’s easy to do online.
Taking on your first employee also requires you to register as an employer, to take out employers’ liability insurance, and to take the reasonable steps necessary to keep your workforce safe.
A new requirement for private limited company directors is the need to maintain a Person of Significant Control Register. This is essentially a list of those persons who not only own the company but who benefit from it in practice.
These are just some of the legal requirements that ought to be on your radar when starting up. And yes, keeping on top of them might seem daunting, but it doesn’t have to mean drowning in red tape. For a straightforward overview, head over to our legal category in the Help Centre.
10. Understand company shares
If you intend to get investors on board, it’s essential to be able to transfer ownership of part of the business to those investors in return for cash. A company structure gives you the ability to do this through the creation of shares. In other words, units representing the value of the business that can be transferred to multiple parties (shareholders).
Creating shares can give you the flexibility to control and structure your business in a way that best suits your goals. For instance, you might want to give a member of your family a stake in the business without necessarily giving them a say in how it is run. In other situations, it might be desirable to offer employees a share option in lieu of a salary rise.
For a complete guide to understanding different share categories, just pop over to the Help Centre.
So there you are: that’s our 10 step guide to the initial aspects you need to think about when forming your company. There is a lot to the think about for sure, but we at The Formations Company are here to give you all the advice and guidance you need for every step of the way. If you’re ready to find out more about business specifics, then you can explore our help center and search page and discover a vast array of articles designed to equip you with the skills to run a company successfully.