There are many obvious mistakes to avoid when forming a company. Some decisions made when registering the company may seem perfectly reasonable at the time but could be the wrong decisions in retrospect. These can be less obvious. Here are just some of the things existing companies will often wish they had done differently when starting a company.
1) Choosing the right Company name
Choosing the right name is one of the first big decisions made by new companies. This will be the first point of contact for many customers and will establish the identity of the company. The right company name can be just as important as the product when determining the growth and viability of a brand. There are some pitfalls to choosing this name that may not seem so obvious initially.
Is the name descriptive? – Freestanding company names are all well and good when there is an established brand behind them. Amazon is a prime example of this (excuse the pun). However, this is not always suitable.
A descriptive name can ensure customers can easily associate your company with a particular service. This does not mean the company name needs to be boring. Wordplay can be a great help when used in the right context. The Gardening and Weeding Service will not be as catchy and memorable as The Weed it and Reap Gardening Service.
Is the name memorable? - You may have provided an excellent service to your customer but how can then recommend you to their friends if they cannot remember the name of the company? Unnecessarily long or convoluted company names can detract from invaluable word of mouth marketing.
Is the name personalised? – It is easy, and quite common, to reference your name in the company name. The may not be as ideal as the company grows. Will customers really envisage Dave’s plumbing to be a reputable, national brand? Likewise, if the company is to be sold at a later date any potential investors may be put off by a personalised company name.
Fear not, mistakes or bad decisions with the company name are easily remediable. The name of the company can be changed at any point during the life of the company; providing the new company name is available! Previous names, however, will be associated with the company in the historical records held on the public company register.
2) Choosing the Right Share Structure
The share structure of a company is used to define the ownership structure. For example, two equal partners would have 50% of the shares each. However, the lack of a clear plan or shareholders agreement can cause ambiguity with respect to the number of shares that should be issued to each shareholder. If one individual will be making more of a contribution towards the company why should another have an equal right to decision making and dividends?
Similarly, many new companies will issue shares to their spouses or family members as a means to benefit from the tax advantages this may afford. There is certainly a sound financial reason to do so, however, not considering the rights attached to the shares could be a costly mistake.
It is possible to change the share structure at a later date but this may require approval from all shareholders with voting rights. Many shareholders will agree that they wished they formed the company with multiple share classes and differing share rights to avoid disputes later down the line.
3) Choosing the Right Address
One aspect of registering a UK limited company is defining the address that will be the registered office for the company and also the service address for the director. This needs to be a bricks and mortar address that Companies House and HMRC can use to send any statutory correspondence to.
The address chosen at the time of incorporation may initially seem like a trivial decision and many will simply use their home address for this purpose. However, this can have long-lasting impacts in the future. The registered office and service address of a company is publicly available on the company register. Even if the address is changed at a later date the initial address will still be publicly available in the historical records of the company.
Companies formed with the residential address as the office address of the company may find they are receiving unsolicited visits by salesmen and unwanted junk mail. This is an especially important point to consider when the address is shared with friends or family.
A common regret for business owners is associating their home address with the business address. Ideally, there should be a degree of separation between your personal life and the company. Fortunately, there are ways to avoid this for new businesses. The registered address of the company can be an accountant’s address or the address of a service provider such as ourselves.
4) Choosing the Right Business Partners
Many business ventures start out with a shared idea between friends or family. This can work if there is a strong relationship between those involved. However, a strong relationship is not the only important factor.
For the best chance of success and longevity, there should be a shared vision with respect to how the company operates and the direction the company should take. The initial idea may be all well and good but disputes will arise if your friend has different plans for the future of the company.
Not only could this affect the friendship, but the business could suffer too!
5) Hiring an Accountant Sooner
Throughout the life of a company, it is imperative that accurate bookkeeping records are held and the statutory filing requirements are met. It is feasible to manage this without an accountant and many will hold the conception that the money spent on an accountant can be better spent elsewhere, especially in the early stages of the life of the company.
This can be a false economy. Accountants will cost money but the lack of an accountant could cost more!
6) Started the Company Sooner
Some Limited companies will be registered with the intention of starting from scratch. Others will be established sole traders that are transitioning to becoming a limited company so as to benefit from the advantages of doing so.
If a sole trader has a particularly good year they would pay tax on the personal income they have received. A limited company, in comparison, with a similarly successful year could leave money in the business to reinvest in capital.
Sole traders may be paying more taxes whereas a limited company could have kept some of this money in the business to be reinvested or extracted in a more tax efficient manner at a later date. For this reason, it is a regret of many existing companies that they did not get started sooner!
Many decisions may seem right at the time but can be made with little consideration of the impact these decisions can have in the future. It is possible in many cases to make changes to the company. That being said, the prevention is better than the cure. If you would like assistance with registering a limited company please get in touch.