How to set up a limited company

New businesses usually fall into one of three categories – a sole trader, partnership or a limited company. 

Which one is best for you will depend on how you run your company and how long it’s been trading for. But if your company is expanding and you’re looking to take on more staff, forming a limited company could make the most sense. 

Here’s our step-by-step guide on how to set up a limited company. 

Why set up a limited company?

There are a number of reasons why you might want to set up a limited company. For a start, your business will be its own legal entity with its own bank account. This means that as a company director, your personal and business finances will be separate and you can’t lose more than the face value of your share in the business. In other words, you can’t lose your personal assets if your business fails, as you could if you were a sole trader. 

A limited company can be set up by one person who will be the sole shareholder of the company, or it can be set up by several shareholders.  

Is setting up a limited company right for your business?

If you started out as a sole trader and your business has now expanded and has a higher revenue, it could be worth forming a limited company. Rather than paying income tax on your earnings, as you do as a sole trader, being a limited company will mean you’ll pay corporation tax on your profits. This could work out cheaper, particularly if you’re a higher rate taxpayer. It also means that you will no longer be personally liable for business debts.

Setting up a limited company can also make sense if you’re looking for more ways to fund your business, such as private equity funding. Plus, it’s a better option if you want to employ staff as you can pay salaries through the Pay as You Earn (PAYE) scheme.

Finally, becoming a limited company can also make your business seem more professional and it can be easier to sell the business at a late date.

Choosing a name for your limited company

Choosing a name for your limited company might be a bit of fun, but it can also be frustrating if you discover the name you want is already taken. Your company name must be unique and not too similar to an existing company. It must not be offensive and must not contain potentially misleading words that might imply you hold professional qualifications when you don’t.

Before making any decisions, it’s worth carrying out a search on Google and checking the Companies and Intellectual Property Commission for a list of businesses with similar names. Remember that your company name must end in ‘Limited’ or ‘Ltd’. Note that you can trade using a different name to your registered name, but this must not include ‘limited’ or ‘Ltd’. 

Key differences between a private and public limited company

Public limited companies are similar to private limited companies but there are some important differences, as outlined below:

• A public limited company must have a minimum of R50,000 in share capital, but there is no such minimum for a private limited company. 

• Public limited companies can sell shares on the stock market to raise money, but private limited companies cannot. Instead, they can only sell or transfer shares privately. 

• Public limited companies must have at least two directors and a qualified secretary, while private limited companies require at least one person to act as a director. This person can also be the sole shareholder and there is no requirement for a company secretary.

• A public limited company must file accounts within six months of the accounting year, but this is nine months for private limited firms.  

Most freelancers, contractors and small businesses will set up as a private limited company.

What are the legal requirements for limited companies?

Although there are many benefits to setting up a limited company, there is much more administration involved and you are required to have at least one director to run the business. 

Company directors are legally required to:

• File an annual return with Companies and Intellectual Property Commission. This should include details of the directors, the registered office, share capital and shareholdings.
• File the company’s annual accounts to Companies and Intellectual Property Commission.
• Submit your company’s annual corporation tax return.
• Ensure the company’s corporation tax bill is paid – the deadline is usually nine months and one day after the end of the accounting period.
• Register the company for VAT if its VAT taxable revenue has exceeded R85,000 over the past 12 months. 

How do I set up a limited company?

Once you’ve chosen your business name, you can register your new business as a limited company. It’s relatively straightforward if you want to do this yourself, but you can also choose to pay an agent to register for you which can save time and help reduce mistakes. 

Register your own limited company

If you choose to register your own limited company with Companies and Intellectual Property Commission, it costs R12 to submit your registration and you can pay by debit or credit card. Your company will usually be registered within 24 hours.  

How many limited company directors should you have?

You will need at least one company director to set up a private limited company. This is usually the person starting the business, but you can choose more than one if you prefer. If you’re setting up as a public limited company, you’ll need to have at least two directors. Company directors must be at least 16 years old. They do not have to live in South Africa but the company must have a South African registered office address.

If you’re setting up a public limited company, you’ll also need a company secretary to maintain statutory registers and keep minutes of board meetings.  

What documentation and evidence is needed to form a limited company?

There are certain registration documents that you will need to submit to Companies and Intellectual Property Commission before you can start trading. These include:

• A memorandum of association. This is a legal statement signed by all initial shareholders or guarantors agreeing to form the company. If you register your company online, you won’t need write your own memorandum of association – it will be created automatically as part of your registration.
• Articles of association. These are written rules about running your company agreed by the shareholders or guarantors, directors and the company secretary.

You will need to keep records of all significant details about your company, including its accounting records, for at least six years. 

How do I choose a registered office address?

When you register your business, you’ll need to include the registered office address which is where all written communication must be sent. 

This address must be a physical address in South Africa and in the same country your company is registered in. So if your company is registered in Scotland, it must have a registered office address in Scotland. You can use a PO Box but you must still include a physical address and postcode. 

Bear in mind that your company address will be publicly available on the online register. If you don’t want your address to be publicly available – if it’s your home address, for example – you can choose to use a registered office address service which will cost around R50 per year. 

What should I do after registering a limited company?

Once you’ve registered your limited company with Companies and Intellectual Property Commission, you’ll be sent a certificate of incorporation which will confirm that the company legally exists and shows the company number and date of formation. If you’ve registered online, you can register for corporation tax at the same time. If not, you must do so within three months of starting to trade so that you can file your company tax return each year and pay corporation tax. If you don’t do this in time, you could face a penalty.
At some point, you might also need to register for VAT – you must do this if your VAT taxable revenue has exceeded R85,000 over the past 12 months, but you can also choose to do it if your taxable revenue is less than this. Your taxable revenue is the total value of everything you sell that’s not exempt from VAT. If you do register for VAT, you will also need to complete a VAT return each quarter.