Creating a company doesn’t have to be a complex process…but it’s perfectly possible to make it so.
A lot of the infrastructure to get your company off the ground is reasonably straight-forward — but possibly only so in hindsight. For me, the past year at Humanise.AI has been a voyage of discovery. If you’re birthing your own company, you might find this guide demystifies what can at first seem a daunting subject.
Please note: This is a UK guide. The rules, regulations, laws, government bodies and processes are obviously different in each country. If you’re not creating a startup in the UK, this guide probably isn’t for you. If you are in the UK and you’re wondering how the infrastructure of a company works, read on…
Let me start with a word of advice. There’s a surprising number of important login accounts and secret reference codes you need to run a company. If there is one recommendation I can make, it is to make sure you have a good filing system and carefully record everything for future reference. Getting a reminder for many of these numbers often entails a piece of snail-mail being sent to your registered address — which is not very helpful if there’s a regulatory deadline looming!
When you first create your company, it has to be registered at Companies House. The creation of a company is a very simple exercise and once registered, you’ll be issued with a Company Registration Number. That’s a fairly critical number and you’ll need it for lots of other things you need to do.
Companies House will also issue you with a Company Authentication Code that you need if you want to make any changes to your company registration. Again, keep that safe!
You will need a Shareholders Agreement, which details the agreements you have between your co-founders and any investors. It covers basic things like “what happens if someone decides to leave”, “how do we vest shares to encourage founders to stay”, “what agreements are needed to accept an investment”, etc. A good lawyer will have standard solutions and clauses for most any topic, which can help to avoid racking up fees by creating something unique. It’s worth finding a lawyer who has experience in helping create startups and who can offer a starter agreement to speed things up.
The Shareholder’s Agreement is a private document between the parties involved and not publicly available — so you can include whatever you need to. It’s likely that if you take future investment rounds, the document will get rewritten to reflect the needs of those investors. Also, with agreement from all parties you can revise the document at any time you desire. Given this, it may be appropriate to avoid lengthy theoretical debates about future scenarios and focus agreements on the immediate year-or-so ahead, with the acceptance that the document will be revised or rewritten in the not so distant future.
When forming a company — and especially when accepting investments — there tends to be a lot of documents to sign. When those documents need to be signed by multiple parties, this could become logistically difficult if they all need to sign the same physical piece of paper.
Luckily, there’s a simple way around that. Each party can print and sign (but not date) their own copy of the document and send that (physically or electronically) to your lawyer. Once the lawyer has all signed copies, they collate them, add the date, and issue as a ‘completed’ document. In this way, the parties to an agreement need never all be in the same physical place in order to all sign the same document.
You’re obliged to inform HMRC once your company starts trading. It’s possible to have a dormant company that isn’t trading, but probably the reason you’ve just registered your company is because you do intend to trade.
You can register with HMRC for tax purposes at their website. HMRC will issue you with a letter in the post to your registered address that provides your Unique Taxpayer Reference (UTR) and Tax Office Number. Keep those safe!
In the UK a company must be registered for VAT when it has a taxable annual turnover of over £85,000. But you can also register if you have a lower turnover. Why might you do that? Well, not having a VAT number advertises that you have less than £85,000 turnover. That may — or may not — be something you want to advertise.
If/when you register you’ll be given a VAT Registration Number that you’re going to need to add to every invoice/quotation you have in the future.
To administer your company’s tax affairs you need to register with Government Gateway, which will result in a generated Government Gateway Userid and associated Password.
Pay As You Earn (PAYE) Salaries
As a company, you probably want to pay your employees a salary. PAYE is the way that employers pay salaries and ensures they are deducting the correct tax and national insurance contributions and paying those to HMRC.
To setup PAYE, you need to go to the Government Gateway website and register for PAYE. This will result in another postal letter to your registered address with your Employer PAYE Reference and Accounts Office Reference. Note: both of these numbers include within them a PAYE Tax Office Number, which confusingly does not appear to always be the same Tax Office Number included with your UTR.
You will also be sent a Service Activation Code that you need to enter into your Government Gateway account to activate the PAYE service after registration. If you don’t activate it, your accounting system cannot login to report PAYE payments.
I strongly recommend one of the cloud-based accounting systems like Xero — they’re low-cost and remove a huge amount of hassle. Any half-decent system will handle your tax and national insurance calculations, communicate reporting to HMRC, sync with your bank account, allow you to reconcile bank transactions, etc — all basic accounting stuff that you’re going to need to do. Personally, I’d avoid anything that isn’t cloud-based — in the dynamic environment of a startup, access to your accounting system from anywhere can turn out to be pretty handy.
To make salary payments, you will also need a company bank account. Of course, a bank account is also pretty handy if you intend to bill clients — which, after all, is the purpose of a business. Duh!
Any UK bank will issue you with a UK Account Number and Sort Code. If you need to accept or make international payments, you also need to ask for your International Bank Account Number (IBAN), which identifies your account, and the bank’s SWIFT code. Confusingly, some banks refer to the second as the SWIFT Code, others as the SWIFTBIC and still others as simply the BIC — these terms all refer to the same number and are used interchangeably around the world.
Once you have a Bank Account, you probably also need a Debit Card, so that you can pay for online subscriptions — like your cloud-based accounting system. Your Debit Card will have it’s own Debit Card Number, Expiry Date and CVC Code.
If you’ve chosen a half-decent accounting system, it should also have a payroll facility so that you can pay and track employee hours worked, vacations, bonuses, etc. Payroll can be a bit of a black-art and I won’t go into all the details here because I’d still be writing a year later!
However, what is worth noting is that your payroll system should generate payslips and workout Tax and National Insurance contributions for you and report those to HMRC, so that your tax affairs are in order. It’s a legal duty to do this accurately, so the small amount of money you pay for a accounting/payroll system is a wise investment.
Once you have a pay-run (typically for a calendar month) you want to process, the payroll system should generate a BACS file that you can then upload to your business bank account. Your bank will then process the payroll and make payments to employees on a 3-day cycle. If you don’t have BACS setup, you can make manual bank transfers for pay using your company’s online banking.
As a UK employer you will need to look into auto-enrollment for a pension scheme. It’s now a requirement for all employers to provide a pension scheme for their employees.
As part of this process you will need to register with the Pensions Regulator. They will send you a letter with a 10-digit letter code that you will need in order to link your Government Gateway account with your Auto-enrolment declaration.
Once you have this, you will need to choose a pension provider, set up your employees in it and start making contributions.
Pensions themselves are a whole other rabbit hole I’m not going to go into here, but once you’ve set one up, you need to declare to the Pensions Regulator that you are compliant. For this you will need your Government Gateway account, your Pensions Regulator Letter Code and your PAYE Reference. With these, you can complete a declaration of compliance with regards to the pension arrangements you have made for your employees.
Note: employees can choose to opt-out of your pension scheme if they so choose. In the early days of a startup money is tight, and so pensions might not be everyone’s first priority — after all, you’re all going to be billionaires soon, right? So, it’s possible to be in the slightly weird situation of having to set-up a pension scheme that everyone choses to immediately opt-out of…such is life!
If you’re lucky enough to get some external investment for your business, you’re almost certainly going to want to look into the government venture capital schemes, such as SEIS or EIS. These incredibly generous schemes can dramatically reduce the amount of capital risk your investors are exposed to — and possibly encourage investors who might otherwise not be interested, to take a punt on your little startup.
In fact, it’s quite likely that a savvy UK investor would insist on qualification under SEIS or EIS schemes because of the tax benefits. To ensure your company qualifies prior to committing the investor, you can apply for Advanced Assurance from HMRC.
But there is one wrinkle — if you apply to HMRC before you’ve finalised your Shareholders Agreement or other relevant documentation for the investment, there’s a risk that something might invalidate any assurance you receive. That assurance turns out not to be an assurance in the way most of us would understand — it’s more of a “maybe”.
It’s therefore best to finalise all the documentation before applying for Advanced Assurance. However, HMRC can take upto two months to reply — which might slow your whole investment process down quite drastically.
To address this, it’s possible to get your investors to sign and be committed to their investment on the qualification that you are indeed successful in getting HMRC Advanced Assurance. Doing that avoids the risk of your investors getting cold feet whilst you wait for a letter from HMRC to drop through your letterbox — which is definitely something you want to mitigate…as the old sales saying goes; “time kills deals” !
None of this is especially difficult; I figured most of it out for myself. Hopefully this guide will help you along the way too, making it a little easier than it was for me.
I must emphasise: Good record keeping and prompt reporting go a very long way to eliminating the stress of giving birth to a new company. I’m a big fan of creative freedom and off-the-wall ideas, but I have to admit that the mechanics of a company are one place where it’s best to just buckle-down, understand the rules and be methodical about record keeping!