Common Company Formation Mistakes to Avoid

If you have decided that you are going to form a company, there is a lot that needs to be considered. Needless to say, you will want your company to be a rousing success, and there are many elements that need to come together to make sure that this is the case. Firstly, you need to make sure that you form your company correctly to begin with. With that in mind, read on to discover some of the most common company formation mistakes that you need to avoid…

Typos – There is only one place to begin, and this is with typos! You are probably thinking that you would never be stupid enough to include typos in your application. Well, you would be surprised by how many people make this mistake. In fact, typos and misspellings are one of the most common errors made when supplying data to Companies House. This is relatively easy to fix, but you could end up needing to pay a fine to do so.

Issuing too many shares – Another common company formation mistakes is issuing too many shares. The vast majority of businesses formed have a small nominal amount of shares that have been issued at the time of corporation. For instance, a business that is owned by one person only may be registered with just one single £1 share. This is usually the way people go about it. However, there have been cases whereby people have issue a million £1 shares to a shareholder. They think this is a smart move, however, it is usually not advised. This is because you are heightening your liability of the shareholder, and so you need to think about how these shares are going to be accounted for or paid for. There is no simply fix when you create too many shares either, as this is not something that can just be reversed, so this is definitely a mistake you need to avoid to begin with.  

Incorrect supporting data – When it comes to company formation in the UK, you will be required to provide a number of documents that supports your application. This is where a lot of new business owners go wrong. They do not supply any data to go with their application, or the data they do supply is insufficient. When this happens, all you are doing is drawing out the process. It is best to supply as much data as possible.

Matthew Henry
Failing to register for corporation tax – As a business in the UK, there are a number of different taxes that you are going to be required to pay. One of these taxes is corporation tax, which is a tax on your profits. If you decide to start a private limited business, you must register for this type of tax within three months of forming your company. If you do not do this, then by law, you are not able to begin trading legally. What if you do not earn enough to ever pay corporation tax? Well, you still need to be registered for it!

Forming a limited by shares business instead of a not-for-profit company – If you are trying to launch a not-for-profit organisation, you need to register it as this, rather than a limited by shares business. A lot of people do the latter, but this means you have the intention of making a profit, so it is the wrong type of company. Moreover, you cannot swap between the two types of businesses, so you would actually need to strike off or dissolve the business you first registered, and then register a new business as a not-for-profit organisation.

Issuing shares to all directors – A lot of businesses have directors that are also shareholders. If this is the case, it is vital to separate the running of the business as a director from the owning of a business as a shareholder. A shareholder has rights within the business. These are the rights that are detailed by the Companies Act 2006. They can also profit from the sale of the company, receive distribution of profit by dividend, and they have voting rights at meetings. This is why you should only ever issue shares to people that you intend to ‘own’ a share in the company.

Appointing directors that are not the right age – This is something that a lot of parents tend to do when they are establishing their business. They want their daughter or son to be involved, and so they will put them as a director of the business. However, all company directors in the UK need to be at least 16-years-old. Your application will be rejected if you attempt to put a director that is not of legal age.

Choosing the wrong company address – Last but not least, your business address is more important than you probably realise. Whenever there is official communication between you and the UK government, this will be sent to the address in question. You can use your home address if this is more suitable. You do not need to choose the offices that you are operating your business out of. The only restriction is that it must be a physical address, it cannot be a virtual one, and it does need to be in the home country of the company.

As you can see, there are a lot of mistakes that business owners make when it comes to company formation. If you can avoid these errors when you are forming your business, you can give yourself a great chance of getting off to a smooth start. Good luck!


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