A limited company is a form of business which is legally separate from its owners (typically shareholders) and managers (formally called directors). In the UK, it must be incorporated at Companies House. This confers the status of being a separate ‘legal person’ from the people who run it, with a unique company registration number.
Thereafter, it is governed by the requirements of the Companies Act (and its own articles of association). It must make returns of information to Companies House. That information about limited companies is held on the public register, which is available for anyone to see.
Even if a limited company has one person involved, who is the sole shareholder and lone director, it’s still a distinct legal entity, legally separate from that person.
As a limited company is separate from its owners in law, that means it:
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- Can enter into contracts in its own name, including employing staff
- Is responsible for its own actions, and can sue and be sued
- Has the legal to right to money it makes from sales and can keep its profits
- Is responsible for paying its own debts and liabilities
What is ‘limited liability’ in a limited company?
This is the major reason why a limited company is a popular structure for a small business. The owners of the company are protected by ‘limited liability’, so unless there’s fraud or other serious wrongdoing the amount they have to lose if the company fails is strictly limited. If the company cannot meet its debts or liabilities, the owners usually risk losing only:
- For shareholders, the nominal value of the shares they hold;
- The amount of any guarantee (for members of companies limited by guarantee);
- Any amounts they’ve already invested into the limited company; and
- The amount of any personal guarantee they’ve made to the company.
This is different from a sole trader or general partnership, both unincorporated businesses where there is no legal distinction between the owner and the business. Therefore, if the business fails or cannot meet its liabilities, the owners will be personally responsible. They potentially face having to sell or surrender their personal assets in order to meet the debts of the business. While an unlimited company is formally incorporated at Companies House, the difference to a limited company is that its shareholders are personally liable for any debts if the company becomes insolvent.
What types of limited company are there?
In the UK, there are three main types of limited company:
Let’s look at each of these types of limited company in turn.
Private company limited by shares
When someone refers to a limited company, they’ll most likely be talking about a private limited company. Most UK limited companies are set up as private companies limited by shares.
Onwership of the company is divided into shares, which are distributed between shareholders. Each shareholder can buy one or more shares in the company. Their liability is typically limited to the amount paid (or due to be paid) for those shares.
In many private limited companies, there is just one share issued to a single shareholder. That shareholder therefore owns 100% of the business and can effectively control it. The same would be true if there were 100 shares issued but still all to the same shareholder.
In other companies, there are more shareholders. Each shareholder’s percentage of ownership, voting rights and right to any profits paid out as dividends then largely depends on how many shares they own.
ABC Limited issues 100 shares at the nominal value of £1 per share. Kelly is issued 10 of these 100 shares, so she effectively owns 10% of the company. Typically, that 10% ownership share will mean:
- Kelly will receive 10% of any total dividend declared by the company
- She will hold 10% of the votes on any matters decided by the company’s shareholders
- If the company is wound up or sold, after all other liabilities are settled, Kelly will have the right to 10% of any capital that remains in the business
The most that Kelly will have to contribute towards company debts is £10, the amount she’s agreed to pay for the shares. Dependent on the terms of the share issue, she might pay this amount up front or, in the case of unpaid shares, at a later date.
There is no upper limit to the number of shares (and therefore shareholders) a limited company can have.
Private limited companies cannot offer shares to the general public. The company’s own articles of association may further restrict who is eligible to become a shareholder.
The shareholders of a limited company appoint directors to manage the business on a day to day basis. In smaller companies, the shareholders are likely to appoint themselves as directors. In companies with more shareholders, they will not usually not all act as directors. Directors may be appointed who are not shareholders, but who are judged to be most capable of taking the business forward and therefore delivering value for shareholders.
This type of business structure is extremely popular amongst commercial businesses both large and small, since it combines the potential to share in profits with a clear restriction on personal financial liability. As shareholders will usually only be responsible for what they’ve agreed to pay for the shares they hold, their personal assets will not be at risk if the company encounters financial difficulties.
Public limited company
Like a private limited company, ownership of a public limited company is divided into a number of shares. The liability of shareholders is typically limited to the amount they have paid for their shares in the company.
Before it can trade, a public limited company must have issued shares with a combined nominal value of at least £50,000. There are also other requirements, including that at least two directors and a company secretary are appointed.
Public limited companies can offer shares to the general public. Some also list their shares on a stock exchange (the most well known of which is the FTSE 100).
This structure is not generally used for new, startup businesses. It’s more likely to be found in larger, more established businesses which reach a certain size and look to “go public”, thereby benefiting from a wider public market for their shares.
You might be interested to read more about public limited companies or the advantages and disadvantages of a public limited company.
Private company limited by guarantee
Companies limited by guarantee do not have shares or shareholders. Instead, they have guarantors (also called members) who guarantee to pay a fixed amount towards the company’s debts. The guarantee must be settled if the company can’t pay its bills. In most companies limited by guarantee, the guarantee is a nominal sum of something like £1. Typically, that’s the limit of each member’s liability, meaning their personal assets are protected in a similar way to a company limited by shares.
Guarantors appoint directors to manage the day-to-day running of the company, although there’s nothing to stop someone acting as both a member and director.
This type of limited company is used by many non-profit organisations, like residents’ management companies set up to oversee the management of a block of flats. Historically, they’ve also been used by charities, although now a specialist Charitable Incorporated Organisation vehicle is available. Any surplus income which is generated is usually reinvested in the business, rather than being withdrawn by the members as income.
We’ve written an article all about the key features of a company limited by guarantee.
Limited, but not limited companies
Business entities other than limited companies can offer a form of limited liability to those who invest in them.
Limited liability partnership
A limited liability partnership is neither a partnership nor a company, but has features of both. It’s often used by those in a profession where a partnership was the traditional choice, like accountants and law firms.
An LLP does not have shares, shareholders or directors but instead members who both own and run the business. While that makes them similar to the partners in a partnership, they do benefit from limited liability. Unless they provide additional guarantees, each LLP member is only liable for the amount they have invested in the limited liability partnership.
Elsewhere on our site, you can read more about the features and benefits of a limited liability partnership.
This is a type of partnership, where there are two types of partner – general partners and limited partners. General partners manage and direct the business, but they are liable for any and all debts incurred by the business, meaning their personal assets are at risk.
Limited partners, by contrast, benefit from limited liability. Their liability is capped at the amount of their investment in the partnership (and any personal guarantees they’ve given). In return, they sacrifice any right to direct the business – so they’re something akin to a “sleeping partner”.
Limited partnerships are rare in the UK, sometimes being used for investment purposes.
In another article, we look in detail at the features of a limited partnership.
Advantages and disadvantages of operating as a limited company
- The main advantage is limited liability afforded to the owners
- A limited company can give the appearance of credibility and prestige to your business.
- Often, a limited company can provide greater tax efficiency
- There are wider options for raising capital
- By issuing shares or transferring shares, it’s relatively easy to bring other people into ownership of the business. If you want to exit the business, you can sell your shares to someone willing to purchase them.
We’ve written an article that explains in detail the advantages of a limited company.
There are some disadvantages of a limited company, when compared to a sole trader or partnership, to be aware of:
- There are additional reporting and filing requirements
- Accounting and taxation requirements are likely to be more complex
- Therefore, potentially higher legal, accountancy and other administrative costs
- Information about the company, including basic details of directors, shareholders and people with significant control over the company, is available to anyone on the public record
- If directors are shareholders are different people, they may have competing visions about the best direction for the company
How to form a limited company
It’s easy to form a limited company. We’ve written a detailed guide on how to register a new limited company, but the key steps are:
- Choose a company name
- Assemble the information needed to set up a company
- Prepare the company’s memorandum and articles of association
- Submit the incorporation to Companies House
- Wait for acceptance, when you’ll also receive the company’s certificate of incorporation
- Hold the company’s first board meeting and write up the minutes
- Establish the statutory registers required for the company
- Issue share certificates to shareholders (or, for a company limited by guarantee, membership certificates for members)
There’ll be number of things to consider once the company is formed, starting with banking and insurance arrangements.
Taxation of a limited company
As a separate legal entity, a limited company is subject to taxation in its own right.
After the company is incorporated, you’ll need to register for corporation tax with HMRC. On a regular basis, a corporation tax return must be filed and any corporation tax due paid to HMRC.
The company may be subject to other taxes:
- VAT – if relevant turnover will exceed the VAT registration threshold or you opt to register voluntarily
- Pay as You Earn via a payroll scheme (and National Insurance Contributions) – if the company employs staff
- Capital gains tax – when certain business assets are sold
- Other taxes, depending on the nature of the business and the trade it undertakes
In each case, you’ll need to register for the tax, typically with the appropriate section of HMRC. You’ll then be required to file regular (usually quarterly or annual) returns of information and pay any tax due. There can be penalties and sanctions for a company and its directors if returns are not submitted or tax due not paid by the appropriate deadlines.
Operating a business as a limited company rather than as a sole trader or partnership used to bring significant tax advantages. Shareholder directors could pay themselves a tax-efficient mix of salary and dividends, minimising both National Insurance Contributions and the level of income tax payable.
Recent tax changes have minimised the opportunities for using dividends to minimise tax. But a limited company still offers tax-planning opportunities, for example by leaving surplus income in the company and withdrawing it in a later tax year.
If you’re unsure about your tax responsibilities as a limited company, we strongly recommend you consult an accountant, who can provide advice that takes account of your personal circumstances.
Ongoing responsibilities of a limited company
Limited companies are subject to stricter compliance requirements than sole traders or partnerships. However, it shouldn’t pose too many problems if you employ a combination of sound habits, a good accountant and quality software like Inform Direct to keep on top of everything.
A limited company must file accounts with HMRC and Companies House each year, in most cases within 9 months of the year end of the business. To enable you to file accounts, you’ll need to maintain appropriate records of things like sales, purchases you make and other payments.
Every company must maintain a range of statutory registers, which shareholders (and others) can ask to inspect. The registers include details about those who own the company (a Register of Members), manage it (the Register of Directors) and have the ability to control or otherwise strongly influence it (the Register of People with Significant Control).
You’ll also need to arrange and keep records of meetings of the directors and shareholders.
Each year, every limited company must file a confirmation statement with Companies House. Depending on circumstances, you may also need to make other event-based filings, for example if a new director is appointed or further shares are issued.
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