10 company formation mistakes to avoid before you apply

1–2. Unchecked names and rushed address choices

Mistake 1: treating a Companies House name search as trade mark clearance. The legal register and brand rights are separate. Check relevant trade marks and similar businesses before you commit to a logo, domain or launch.

Mistake 2: entering your home address into public fields without considering privacy. Registered offices and director service addresses are publicly visible. A later change does not automatically erase historical documents; choose a compliant address arrangement before filing.

3–4. Guessing share structure and missing PSCs

Mistake 3: accepting a default ownership split without discussing votes, departure, investment and deadlock. Standard shares and articles may work for a simple business, but they do not resolve every founder relationship. Get advice where ownership is more than straightforward.

Mistake 4: assuming a PSC is always the biggest shareholder. Control can arise through voting rights, appointment rights or other influence. Check all the legal tests and handle verification for each relevant role.

5–6. Leaving verification late and picking vague activity codes

Mistake 5: expecting one director’s verification to cover the whole application. Each relevant individual needs to verify and supply the required code information, while PSC linking steps can have their own windows. Allow time for document or detail mismatches.

Mistake 6: copying another company’s SIC code without understanding its activity. Use the official condensed list and describe what your business actually does. A code is not a licence for regulated activity.

7–8. Comparing only the first price and assuming account approval

Mistake 7: ignoring renewals and paid extras. Address services, admin subscriptions and banking charges can dominate the small registration saving. Compare the actual first-year scope and later annual costs.

Mistake 8: assuming incorporation guarantees a bundled business account. The account provider has its own eligibility and customer checks. Understand the alternative if approval is delayed or declined.

9–10. Mixing money and forgetting the compliance calendar

Mistake 9: using company funds as personal money. Salary, dividends, expenses and loans need different treatment and records. Keep company finances separate and discuss withdrawals with your accountant.

Mistake 10: assuming a certificate means the provider will manage every annual filing. Record accounts, confirmation statements, tax registrations and payment deadlines yourself, and confirm any agent’s contracted scope.

Worth knowing: Cheap registration is a useful saving only if the resulting company is correctly set up and properly maintained.

Use a two-person-style review even if you are the only founder

Save an application preview and inspect it as though someone else prepared it. Check spelling, dates of birth, public versus residential address fields, jurisdiction, SIC codes, share numbers and PSC conditions. Verify the proposed share structure against your agreed ownership plan rather than choosing defaults because the form accepts them.

An illustrative founder intending 60/40 ownership should not submit two equal shareholdings and promise to fix it later. Changing ownership can involve share transfers or new issues, tax considerations and record updates. The certificate will not identify or repair that commercial mistake.

Confirm that verification is complete and that the personal code belongs to the person entered. Keep company authentication codes distinct. If the package cannot support the correct structure, stop and use an appropriate route instead of hiding a corporate owner or extra shareholder to get through the application.

Different errors need different corrections

If a register detail is wrong, identify the specific Companies House procedure before filing something unrelated. A change going forward and a correction to a historic filing are not always the same operation. Ask the provider what it will correct and whether additional fees apply.

If the selected account is unsuitable or declined, separate the banking issue from the company’s legal existence. The incorporated company can still have filings and tax obligations. Check subsidy conditions, arrange an appropriate account and preserve any correspondence about refunds or additional filing-fee charges.

For missed post, incomplete PSC linking or an approaching deadline, triage by the earliest real date. Contact the responsible provider or adviser and use official services. Do not wait for a general annual review to address an obligation with a short statutory window.

Sole Director vs. The Board: Structuring Your Company's Leadership

The decision of whether to be a sole director or to appoint a board is a foundational one with long-term consequences. Appointing a single director offers maximum agility; decisions can be made and executed instantly without the need for board meetings or resolutions. This is ideal for a single-founder business where speed is paramount. However, this structure concentrates all legal responsibility, liability, and workload onto one person. It can also be perceived as higher risk by lenders, landlords, and some larger clients who may prefer the accountability and broader skillset that a board of directors implies. The introduction of mandatory identity verification for all directors since November 2025 means that adding directors later is an administrative process that requires formal checks, so it's worth considering the optimal structure from day one.

A multi-director board introduces checks and balances, spreads the statutory duties, and can bring a diverse range of expertise to the company's governance. This can improve strategic decision-making and enhance corporate credibility. However, it also introduces complexity. Decisions require formal or informal consensus, and disagreements can lead to deadlock if not managed properly through a shareholders' agreement or well-drafted articles. For day-to-day operations, banks will require mandates from all directors to open or make significant changes to the company account, slowing down processes. The death or incapacitation of a sole director can freeze a company's operations entirely, whereas a board provides inherent succession and continuity, a critical risk-mitigation factor that many founders overlook in the early stages.

Worth knowing: A sole directorship offers speed and simplicity, while a multi-director board provides resilience, shared liability, and broader expertise at the cost of administrative complexity.

Hiring Your First Employee: Deconstructing the True Cost

One of the most significant post-formation steps is hiring your first employee, and a common mistake is to budget only for their gross salary. The true cost to your company is considerably higher once mandatory employer contributions are factored in. For the 2026/27 tax year, the largest addition is Employer's National Insurance Contributions (NICs), charged at 15% on all earnings above the Secondary Threshold of £5,000 per year. For an employee earning a typical salary, this means a significant extra cost on top of their wages. Furthermore, you are legally required to automatically enrol eligible staff into a workplace pension scheme. The minimum employer contribution is 3% of the employee's qualifying earnings, adding another recurring expense to your monthly payroll. These are not optional extras; they are legal requirements enforced by HMRC and The Pensions Regulator.

Beyond taxes and pensions, you must also account for administrative and secondary costs. You will need compliant payroll software to calculate tax, NICs, and pension deductions, and to report this information to HMRC in real time. While some software is low-cost, it is an essential business expense. You will also need to arrange Employers' Liability Insurance, which is a legal requirement for almost all businesses with staff. Potentially offsetting some of these costs is the Employment Allowance, which stood at £10,500 for the 2026/27 tax year. This allows eligible employers to reduce their annual Employer's NICs liability. However, certain companies, such as those with only one employee who is also a director, cannot claim it, making it vital to check your eligibility before you budget.

Worth knowing: Based on illustrative 2026/27 rates, the true annual cost of an employee on a £35,000 salary is over £40,000 before considering any eligible Employment Allowance or administrative overheads.

Your Company Rulebook: The Hidden Risks of Default Articles

When you form a company online, you are typically assigned 'Model Articles of Association' by default. This is a standard template provided by the Companies Act 2006 that works perfectly well for simple, single-shareholder companies. They provide a basic framework for how the company is run, covering topics like director responsibilities, shareholder meetings, and dividend payments. The key mistake is assuming this one-size-fits-all document is suitable for more complex setups. For example, the Model Articles only provide for one class of ordinary share, with all shares having equal rights. This is highly restrictive if you plan to bring in different types of investors or want to give certain shareholders different voting or dividend rights. They also contain limited provisions for dealing with director conflicts of interest, which can become problematic in a multi-director company.

Opting for custom articles from the outset is crucial if you have co-founders or plan to seek investment. Custom articles can be drafted to include specific clauses that protect all parties and align with your business strategy. These might include 'drag-along' and 'tag-along' rights, ensuring minority shareholders are not left behind in a sale, or pre-emption rights on share transfers, giving existing shareholders first refusal on any shares being sold. They also allow for different share classes, such as non-voting shares for family members or shares with preferential dividends for investors. While adopting custom articles involves more thought and potentially a small upfront cost during formation, changing them later requires a special resolution (a 75% shareholder vote) and re-filing with Companies House, a more cumbersome and expensive process once the business is established.

Worth knowing: Model Articles are fine for the simplest solo ventures, but custom articles are a vital, proactive investment to manage co-founder relationships and prepare for future growth.

Forgetting the ICO: The Data Protection Fee New Companies Ignore

A common post-formation oversight is failing to register with the Information Commissioner's Office (ICO). The ICO is the UK's independent authority for upholding information rights, and under data protection law, most organisations that process personal data must pay an annual data protection fee. For a new limited company, 'processing personal data' is an extremely broad definition. If you store customer names and email addresses, have employee records, or even use analytics cookies on your website, you are almost certainly processing personal data and therefore acting as a 'data controller'. The fee is not optional; it is a legal requirement, and non-compliance can lead to fines from the ICO that far exceed the cost of the fee itself.

The fee amount depends on your company's size and turnover. For the 2026/27 period, most new, small companies fall into Tier 1, which costs £52 annually. Larger SMEs will likely fall into Tier 2 at £78, while large organisations are in Tier 3 at £3,763. It's important to assess your status honestly using the ICO's self-assessment tool. Exemptions are very limited and rarely apply to a limited company actively trading or even just building a marketing list. Failing to register is an easy mistake to make when you are focused on launching your business, but it's a compliance task that should be completed within the first month of trading to ensure you are operating lawfully from the start.

• Holding a list of customer or prospective client email addresses.
• Storing contact details for suppliers or partners.
• Having any employees, meaning you hold their payroll and personal records.
• Using CCTV on your business premises.
• Collecting names and addresses to deliver goods or services.
• Tracking user activity on your website using cookies or analytics.

1. 1

   1. Visit the ICO website and locate the 'data protection fee' section.

2. 2

   2. Use their official online self-assessment tool to determine if you are required to pay.

3. 3

   3. If required, complete the registration process by providing your company details and confirming your tier.

4. 4

   4. Pay the fee online to complete your registration.

5. 5

   5. Note the renewal date in your company's compliance calendar to maintain your registration annually.

Worth knowing: Nearly every limited company processes personal data and must pay an annual fee to the ICO; check your obligation immediately after formation to avoid potential fines.

Putting It on Ice: The Dormant Company Option for Founders

Sometimes, plans change after forming a company. A project might be delayed, funding might fall through, or you may need to take a break for personal reasons. In these situations, dissolving the company is not your only option. You can instead choose to make it 'dormant'. A company is dormant for Companies House purposes if it has had no 'significant accounting transactions' during its financial year. This essentially means no income or expenditure, other than a few specific exceptions like paying Companies House fees. For HMRC, a company is dormant for Corporation Tax if it is not trading, receiving any other income, or paying any expenses. Making a company dormant allows you to protect its registered name and legal status at a very low administrative cost.

To make your company dormant, you must inform both HMRC and Companies House, as they have different requirements. You should contact HMRC promptly to let them know you will have no Corporation Tax to pay; they will then issue a notice confirming you do not need to file a Company Tax Return. For Companies House, you do not formally 'register' as dormant, but you must continue to meet your filing obligations. This means filing a confirmation statement each year (costing £50 digitally in 2026) and submitting dormant accounts. Dormant accounts are a much-simplified version of full accounts, stating the company had no significant transactions. This low-effort status can be maintained indefinitely, and you can restart trading at any time by simply informing HMRC.

• Generate sales invoices or receive income from trading.
• Pay for goods or services, including subcontractor or director salaries.
• Pay bank charges or earn interest from a company bank account.
• Issue dividends to shareholders.
• Buy or sell assets on behalf of the company.

1. 1

   1. Cease all trading and business activities immediately.

2. 2

   2. Contact HMRC's Corporation Tax office to inform them your company is dormant and will not be liable for Corporation Tax.

3. 3

   3. Close your company's payroll scheme if you have one registered.

4. 4

   4. When your financial year ends, prepare and file dormant accounts with Companies House instead of full trading accounts.

5. 5

   5. Continue to file a confirmation statement with Companies House annually to keep the company's details up to date.

Worth knowing: Making a company dormant requires notifying HMRC and filing simplified annual returns with Companies House, providing a simple way to pause a business while legally protecting its name.

Transfer or Allot? A Guide to Changing Company Ownership

As your business evolves, you may need to bring in new owners, whether it's a co-founder, a key employee, or an investor. There are two primary mechanisms for this: a share transfer or a share allotment. Failing to understand the difference is a serious mistake that can lead to incorrect filings and ownership disputes. A share transfer is a private transaction where an existing shareholder sells and transfers some or all of their shares to another person. The company itself does not issue new shares; the total number of shares in issue remains the same. This is common when a founder is partially exiting or when shares are moved between family members. The process is governed by a stock transfer form and may trigger Stamp Duty if the consideration for the shares exceeds a certain threshold.

A share allotment, in contrast, is an action taken by the company itself to create and issue brand new shares. This increases the total number of shares in issue and dilutes the ownership percentage of all existing shareholders. This is the standard method for bringing in new investment, as the money paid for the new shares goes directly into the company's bank account, not to an existing shareholder. An allotment requires board approval and must be reported to Companies House using a Form SH01 (Return of allotment of shares) within one month. Getting this wrong—for example, by trying to 'give' a new partner shares without formally allotting them—means they are not a legal owner, have no rights, and the company's records are inaccurate, creating significant problems later on.

Worth knowing: A share transfer moves existing ownership between people, whereas a share allotment creates new ownership and injects capital directly into the company, diluting everyone.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Set up a limited company
• GOV.UK: Running a limited company
• Companies House: Identity verification

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.