What is a limited company?

When starting a business, you must choose whether to set up as a limited company, partnership or sole trader. A limited company is a popular choice: over five million are registered with Companies House, although not all of these are actively trading. But what is a limited company? What responsibilities come with running one? And is it the right option for you and your business?

Key takeaways

• A limited company protects the personal assets of its owner(s) by limiting the financial responsibility to the amount shareholders have invested in the business

• It’s distinct from its owners, which means a limited company has its own legal identity and can enter into contracts, own property and incur debt in its own name

• Running a limited company requires you to meet legal obligations, such as filing annual accounts, submitting confirmation statements and paying taxes

What is a limited company?

A limited company is a type of business structure where the company exists as a separate legal entity from its owners, who are known as shareholders. The shareholders own the company, while directors run it on their behalf. You can be both the director and sole shareholder, or you can have several shareholders and appoint a director to manage the company.

Here are some key features of a limited company:

• It has a separate legal identity from its owners: This means the business’s finances must be kept separate from personal finances

• Shareholders have limited liability: Shareholders are only responsible for the company’s debts up to the amount they invest

• It must register with Companies House: This creates the company and makes it official in the eyes of the law

• It pays corporation tax on profits: A limited company must pay corporation tax on its taxable profits

• Directors must meet legal duties under the Companies Act 2006: These include acting in the company’s best interests and ensuring compliance with regulations

• It must file annual accounts and a confirmation statement: This confirms the accuracy of information held with Companies House to keep the company registration active

• Company information is publicly available: Company details, including director names, financial statements and shareholder information, are accessible to the public through Companies House records

Types of limited companies

There are three main types of limited companies:

Private company limited by shares (Ltd)

A private company limited by shares is a common legal structure for small businesses in the UK, such as independent shops, hairdressers, or consultants. The company is owned by shareholders, and its finances are legally separate from the personal finances of its owners. This means shareholders are only liable for the company’s debts up to the amount they’ve invested.

Private company limited by guarantee

Instead of shareholders, guarantors agree to pay a set amount if the company is wound up, although the personal liability for the guarantor(s) is limited to the amount each member agrees to contribute in such circumstances. Often used for non-profits or charities.

Public limited companies (PLCs)

These sell shares to the public on the stock market and face stricter regulatory requirements than private companies. PLCs are typically larger businesses, such as J Sainsbury PLC and Barclays PLC.

Advantages and disadvantages of a limited company

Deciding whether to start a limited company is an important decision, but it isn’t always an easy one to make. To help determine whether it’s the right structure for you, weigh up the advantages and disadvantages.

Advantages

• Limited liability: Shareholders are liable for the company’s debts only up to the amount they invested, protecting their personal assets

• Separate legal identity: The company exists as a separate legal entity, distinct from its owners, providing clearer ownership and management

• Tax benefits: Companies may pay lower tax rates on profits compared to sole traders’ personal income tax rates

• Credibility: Operating as a limited company can boost credibility with customers, suppliers and investors

Disadvantages

• Regulatory requirements: Limited companies must meet strict legal and reporting obligations, such as filing annual accounts and confirmation statements with Companies House

• Setup and ongoing costs: Forming and maintaining a limited company, including accounting fees, can cost more than running a business as a sole trader

• Less privacy: Information about the company, including financial statements and director and shareholder details, is publicly available through Companies House

• Complexity: Managing a limited company can be more complicated, especially with multiple directors or shareholders

How to set up a limited company

Once you make the decision to form a limited company, you can get the ball rolling quite quickly. Here’s how to set up a limited company in five simple steps:

• Choose a company name: Pick a unique name that isn’t already registered with Companies House

• Register with Companies House: Submit your company details online, including the name, address and director details

• Prepare company documents: Create key documents, such as your articles of association. This is a legal document that outlines the rules and procedures for running your company

• Set up a business bank account: Open a bank account in your company’s name

• Register for taxes: Register with HMRC for corporation tax and, if necessary, VAT and PAYE

Responsibilities of running a limited company

A limited company’s status as a separate legal entity reduces some personal pressure, but you still have lot of responsibilities. For instance, you must:

Comply with legal requirements

Ensure the company meets its legal obligations, including filing annual accounts, submitting confirmation statements and paying taxes.

Maintain accurate records

Keep financial and business records, such as invoices, receipts and bank statements.

Pay taxes

Pay corporation tax on profits and manage VAT and PAYE if applicable.

File annual accounts

Submit financial statements to Companies House and HMRC each year.

Directors’ duties

Directors must act in the company’s best interests, avoid conflicts of interest and ensure compliance with the law.

Report changes

Notify Companies House of any changes, such as new directors or shareholders, or a change of registered address.

Is a limited company the right structure for you?

There’s a lot to consider when deciding whether a limited company is the best choice. Use this checklist to help you decide:

• Do you want limited liability protection? Are you going to benefit from protecting your personal assets from business debts?

• Do you plan to raise investment or offer shares? Do you need shareholders or external investment for growth?

• Are you ready for ongoing legal and financial responsibilities? Are you prepared to file annual accounts and confirmation statements, and manage taxes?

• Do you expect your business to grow? Does your business require more complex management as it grows, such as multiple directors or shareholders?

• Are you willing to meet public disclosure requirements? Are you comfortable with your company information being publicly accessible?

• Can the tax advantages benefit your business? Do you expect the tax benefits of a limited company, such as lower corporation tax rates, to outweigh the costs?

• Do you prefer a formal business structure? Are you ready for the formalities involved, including regular filing and stringent record-keeping?

If you answer 'yes' to most of these questions, a limited company may be worth exploring. If not, consider starting as a sole trader or entering a partnership.