How to start a business in a couple of hours

Plenty of people have ideas for businesses, but I am frequently amazed at how few understand exactly what’s involved in making that business a reality. It’s a question I get asked all the time, and it maddens me when I see people throw money at “company setup” services (normally charging a lot of money). In this post I want to walk through the exact legal steps you need to follow to get up and running with your business, with the hope that once you’ve seen how simple and quick it is, you’ll be inspired to break the shackles of employment and go forth as your own boss.

Before we begin…

Before I dive in, I want to set some expectations. This is not a blog post about business ideas, or how to raise money, or any other kind of conceptual facet to business. This post only covers the legal process for getting a trading entity set up, targeted at people who have got a solid business idea, and just want to get it up and running from an administrative point of view. It is pitched at the absolute beginner, so if you are a bit beyond that then you might find some of this is basic stuff, but there may be some nuggets still.

I should also clarify that this will only cover UK business process. For US or European businesses the processes will differ, although there will likely be some similarities.

Expectations set, let’s get up and running.

Step one: incorporation

To run a business, the first thing to think about is the legal structure of it. This means (in UK law) deciding whether to be a limited company, a partnership or a sole trader. The differences between the options depend on your particular circumstances, and the pros and cons revolve around administrative burdens and debt liability. Let me explain.

Sole trader

A sole trader structure is the simplest way of going into business if you are not planning to hire staff at any point. It has the lowest admin burden because you don’t need to register at Companies House or do corporate annual accounts or pay yourself a salary etc, you simply pay yourself from whatever money you earn, and declare whatever you earn in your annual personal tax return. Any debt you incur has to be dealt with by you personally (as it would in your personal affairs). The really good news is that you don’t need to do anything to get started as a sole trader, just go out and get some business!

Partnership

A partnership is similar to the sole trader structure in pretty much every way, except that everything is split between the partners. Which means, obviously, you can only form a partnership if there are at least two of you going into business together (but it can be more than that of course). The positives are that all the partners will be able to receive income in exactly the same way as a sole trader would (i.e. directly rather than via a salary), but this also means that all partners are equally responsible for debts. If one partner cannot afford to pay their share of the partnership’s debt burden, the other partners must shoulder the responsibility. There is no limit to the exposure, so if a partnership goes wrong you may lose your house to pay the debts of the company.

Limited Liability Partnership (LLP)

This is a newer variant of the partnership where some limits are applied to the debt exposure of the partners. It came about after some major accountancy firms collapsed in the late 1990s due to the rogue actions of a minority of partners, whose actions directly ruined the lives of all the other partners. In an LLP, only one partner — normally the most senior one — has unlimited debt liability, while the others’ exposures are limited to the amount they invested and/or the amount they guaranteed to cover (via a partnership agreement) at the point at which they joined the partnership. Each partner in the company is responsible for his or her own taxes, just like a sole trader.

LLPs have more of an admin burden than traditional partnerships: they must be registered with Companies House (the UK government business registry) and file a return every year, but this is not a huge deal. One potential disadvantage of LLPs is that they cannot receive investment from outside sources, other than bank loans or similar. So if you plan to raise investment from angels, VCs or similar, an LLP is probably not the best route.

LLPs are most commonly used by professional services firms such as accountants, lawyers, doctors and so on.

Limited Liability Company (Ltd)

The most commonly-used structure, a limited company carries the highest admin burden, but affords the most protection from debts. In simple terms, the “limit” refers to the extent of liability that the owners of the company (the shareholders) will face if the company goes bust. As a shareholder, you will only be responsible for debt totalling the amount of money you invested in the company, rather than all of the debt at the time (if that amount exceeds the amount you have put in). So for example, if you are the sole shareholder of the business (we’ll get onto shares in a minute), and your shares are worth £1000 but your business goes bust with debts of £10,000, you will only be personally liable for the £1000 instead of the full amount. It’s a protection mechanism designed to enable you to separate your business from your personal responsibilities — financially, at least.

A limited company is also able to act like a person in some ways, for example you can buy property or other assets in the name of the company, and it is taxed as a separate entity (via Corporation Tax, a tax on the profits of the business each year), leaving the same separation of personal and business in place.

The main advantage of a limited company, beyond the debt protection, is the flexibility around its ownership structure. Essentially, ownership of a limited company is divided up into shares, which in turn are owned by individuals. The number of shares owned by a person, relative to the total shares in the business, determines that person’s percentage of ownership, and therefore their control, by and large. Shares can be exchanged, transferred, gifted, bought or sold, which gives a lot of options when it comes to bringing on outside investment.

The downside of a limited company is the administration required. You need to register with Companies House, pay yourself and your staff via PAYE (payroll, in other words), file an annual return, annual accounts and an annual tax return for your business. It is strongly advised to get an accountant if you go the limited route, but unless you are a professional services firm it is the recommended legal structure if you plan on being more than just a sole trader at any point.

Still not sure?

If you’re still unsure which to choose, this is what I normally advise:

• If you’re not planning on working with anybody else, be a sole trader.
• If you’re starting a professional services (lawyer, accountant etc) business with at least one other person, go the LLP route.
• If you’re any other kind of business, and plan to either take on staff and/or get investment at any point, form a limited company.

Step two: setting up the legal entity

Once you’ve decided the route you’re going to go, getting the entity set up is thankfully quite straightforward — certainly, much more straightforward than it used to be. If you’re a sole trader, there’s nothing you need to do. Just get out there and start trading. Easy! For the other options, there are a few more steps:

• Partnership: for a standard partnership there is nothing you need to do in terms of legal process, however it is strongly recommended that you and your partners sign a partnership agreement before you get going. These are very easy to find, I recommend Rocket Lawyer who have a partnership agreement available here: https://www.rocketlawyer.co.uk/documents-and-forms/partnership-agreement.rl#. Once that’s sorted, you can start trading and taking money. Just remember to file your personal tax returns each year.
• Limited Liability Partnership (LLP): an LLP is somewhat different in that it needs to be registered with Companies House before you can start trading. Thankfully, there are many online services that will handle this for you, such as the Rapid Formations company who will handle the entire process for, online, for £35 at time of writing. If you want to do it manually, you can have a go at filling out the form yourself from the Companies House website. You should also get a separate LLP Agreement that will govern the behaviours of you and your fellow partners, which you can get from Rocket Lawyer here: https://www.rocketlawyer.co.uk/documents-and-forms/llp-agreement.rl#. Personally, unless you have specific needs, I would recommend going with one of the online package services as they tend to be both cheaper and quicker: Rapid Formations can turn it around in 3 hours. Once registered, you will need to file an annual return and annual accounts with Companies House every year.
• Limited Company (Ltd): similarly to an LLP, you need to register your Limited company with Companies House, and again there are hundreds of online services that will handle it for you. I have personally used The Formations Company in the past with great results, and it only took around 15 minutes for each company, costing less than a tenner. You can also use Companies House’s own online service, although this is a little less user-friendly. The manual route involves completing the form from the Companies House website and submitting a document called the Articles of Association. These are basically contracts which govern the general behaviour of the shareholders, and for most purposes some standard ones will suit you just fine. You can grab those here: https://www.gov.uk/guidance/model-articles-of-association-for-limited-companies. Again, though, I would strongly recommend using one of the online services as they make it much easier.

When setting up a limited company, you will be asked a few questions that may confuse you. Without beating about the bush, here are some quickfire responses to help you get through:

• It’s okay to use your home address instead of getting a registered address. Nothing bad will happen, unless you move. It just means that official company documents will be sent to your home, which is probably convenient.
• The share price and number of shares are up to you, there are no specific rules here. Some people like to start with 100 shares priced at 1p each (hence valuing the company at £1). Just go with this if you’re not sure, you can always add more shares at a later date.
• You don’t need to have another person registered as a director, it’s possible to form a limited company on your own. In this case, you would need to be the company secretary as well as the sole director and shareholder. No downsides to that, just go for it.
• You don’t need to have a copy of your share certificates, but it is sometimes nice to download and print one so it feels a bit more, well, official.

There, hopefully that helped you through it. Within a few hours, depending on your method of setting up, your new company will be officially born. But wait, there’s one more step before you can start trading…

Final step: bank account

Unless you’re a sole trader, you’re going to need a business bank account to start taking money from customers. But don’t worry, this is pretty simple as well. I always recommend applying with the same bank that you personally bank with, for the simple reason that you will skip half of the registration and verification service, therefore speeding up the entire process. You may also get a good deal. Of course, you’re perfectly entitled to go and shop around for the best package, but in my experience they are all much of a muchness and I tend to prioritise minimum hassle with these things.

It is highly likely that you will be invited for a meeting with your bank’s business manager, during which he or she will probably attempt to sell you a rafter of additional services such as company credit cards and loans, but for now your main focus is on getting set up so I recommend just pushing back and taking the most basic banking option available to start with.

What next?

Once your company has been incorporated and your business bank account is set up, you’re ready to start trading. Your next steps from here depend entirely on the type of business you are operating and are beyond the scope of this article. However, I hope that, after reading this, you at least can see how quickly and easily the so-called “hard bit” is to complete. If you use one of the online services, you can be up and running in a few hours. So don’t let the process be a barrier to you.

Marc is the founder and CEO of Firedrop, an artificial intelligence web designer aimed at small businesses and entrepreneurs. He has run several small businesses in the past and has incorporated several more.