What is a limited company?

Even if a limited company only has one person involved – a sole shareholder and lone director – it is still legally separate from that person.

As a limited company has its own ‘legal personality’ making it a separate entity from its owners in law, that means it:

• 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 right to money it makes from sales and can keep its profits
• Is responsible for paying its own debts and liabilities.

Even if a limited company only has one person involved – a sole shareholder and lone director – it is still legally separate from that person.

What is ‘limited liability’ in a limited company?

Limited liability refers to the legal protection that shields the owners of a business from personal liability for the debts and obligations of the business. In the event of the business facing financial difficulties or legal issues, the owners’ personal assets are not at risk beyond their investment in the business.

Limited liability is the major reason why a limited company is a popular structure for a small business. Unless there is fraud or other serious wrongdoing, the amount the owners 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
• 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.

The unlimited company, a relatively rare type of company, is incorporated at Companies House but differs from a limited company in that its owners are personally liable for any debts if the company becomes insolvent. Unlimited companies are not subject to the same financial disclosure requirements as limited companies because their owners do not have limited liability.

In the event of the business facing financial difficulties or legal issues, the owners’ personal assets are not at risk beyond their investment in the business.

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.

Ownership 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.

Most UK limited companies are set up as private companies limited by shares.

A limited company can have any number of shareholders. Each shareholder’s percentage of ownership, voting rights and right to any profits paid out as dividends largely depend on how many shares they own.

Private limited companies can’t offer shares to the general public. Only public limited companies can. In most cases a private limited company can offer shares to investors and partner companies, but not the general public. The company’s own articles of association may further restrict to whom shares can be sold.

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. Directors may be appointed who are not shareholders but who are judged to be most capable of taking the business forward and delivering value for shareholders.

Private limited companies can’t offer shares to the general public.

Public limited company

As in 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 where their performance is indicated by an index such as 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 benefitting from a wider public market for their shares.

Public limited companies can offer shares to the general public.

For those wishing to know more, we have further articles about public limited companies and 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 cannot pay its bills. In most companies limited by guarantee, the guarantee is a nominal sum like £1. Typically this is 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.

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.

This type of limited company is used by many non-profit organisations, like residents’ management companies (RMCs) and right to manage (RTM) companies set up to oversee the management of a block of flats. Historically they have also been used by charities, although now a specialist Charitable Incorporated Organisation vehicle is available. Any surplus income generated is usually reinvested in the business, rather than being withdrawn by the members as income.

For more on this type of company, please read our article about the key features of a company limited by guarantee.

Limited liability partnership

A limited liability partnership (LLP) is neither a partnership nor a company but has features of both. It is 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 an unlimited general 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 LLP.

Elsewhere on our site, you can read more about the features and benefits of a limited liability partnership.

An LLP does not have shares, shareholders or directors but instead members who both own and run the business.

Limited 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, plus any personal guarantees they have given. In return, they sacrifice any right to direct the business – making them something akin to a ‘sleeping partner’.

Limited partnerships are rare in the UK, sometimes being used for investment purposes. Scottish limited partnerships are somewhat different in that they have legal personality and are therefore separate from their partners. Some issues stemming from this are addressed in the Economic Crime and Corporate Transparency Bill (2022).

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

There are a number of advantages to setting up your business as a limited company rather than a general partnership or sole trader:

• Limited liability – creditors can’t go after the owners for payment
• 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 sharesor 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.

Elsewhere on our site you can find 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:

• 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 is available to anyone on the public record. This includes basic details of directors, shareholders and people with significant control over the company (PSCs).
• If directors and 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:

1. Choose a company name
2. Assemble the information needed to set up a company
3. Prepare the company’s memorandum and articles of association
4. Submit the incorporation application to Companies House
5. Wait for acceptance, when you’ll also receive the company’s certificate of incorporation
6. Hold the company’s first board meeting and write up the minutes
7. Establish the statutory registers required for the company
8. 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 thereafter, 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 thresholdor 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 can bring significant tax advantages. Shareholder directors can pay themselves a tax-efficient mix of salary and dividends, minimising both National Insurance Contributions and the level of income tax payable.

Yearly changes in tax and National Insurance thresholds and rates can affect the opportunities for using dividends to minimise tax. But a limited company 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. They can help you to plan for the foreseeable future by taking into account your specific circumstances.

Operating a business as a limited company rather than as a sole trader or partnership can bring significant tax advantages.

Ongoing responsibilities of a limited company

Limited companies are subject to stricter compliance requirements than sole traders or partnerships.

A limited company must file accounts with HMRC and Companies House each year, in most cases within nine 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.

Each year, every limited company must file a confirmation statement with Companies House

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.