What is a limited company?

Limited company words concept on wooden cubes
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Oct 13, 2023

Limited companies are businesses that are structured as legally separate entities from their owners. This means that a limited company is, from a legal standpoint, like a person. It can own property, enter into contracts, and sue – or be sued – in its own name.

The liability of the company’s owners or shareholders, meanwhile, is limited to the amount they have invested in the company. It also means that the personal assets of any individual owners or shareholders are protected if the company faces financial challenges.

In the United Kingdom, limited companies will include the abbreviation “Ltd.”, which differs from the abbreviation used in other countries, such as the United States, which uses LLC, short for limited liability corporation. In the UK, they are governed under the Companies Act 2006.

Types of limited companies

According to GOV.UK, there are two types of limited companies:

Limited by shares companies

Limited by shares companies are typically businesses that make a profit. These companies:

  • Are legally and financially separate from the people who run them.
  • Have shares and shareholders.
  • Can keep all profits after paying tax.

Limited by guarantee companies

Limited by guarantee companies are typically non-profit organisations and public limited companies. These companies:

  • Are legally separate from the people who run them.
  • Have guarantors and what’s known as a guaranteed amount. The guaranteed amount is the amount of money guarantors promise to the company if it cannot pay its debts.
  • Invest profits back into the company.

Creating a limited company

Many types of business owners and enterprises choose to create a new limited company. This can include:

  • Small business owners. Small business owners in the UK often choose to set up limited companies. This is because it provides them with limited liability protection, which can help to safeguard their personal assets if the business runs into financial difficulties. 
  • Freelancers and contractors. Freelancers and contractors often set up limited companies to take advantage of tax benefits and to separate their personal and business finances. By operating as a limited company, they can pay themselves a salary and take advantage of tax-efficient payment structures such as dividends.
  • Startups. Many startups in the UK choose to set up limited companies. This is because it allows them to raise funding by selling shares in the company to investors. Additionally, it can help to protect the personal assets of the company’s founders.
  • Professionals. Professionals such as doctors, lawyers, and accountants often set up limited companies to provide their services through. Much like with small business owners, this can help to protect their personal assets and create a more professional image for their business.
  • Property investors. Property investors often set up limited companies to hold their properties. This can help to limit their liability and provide tax benefits.

How to set up a limited company

Before creating a limited company, business owners should determine that a limited company is the best available option.

Other options outlined by the UK government include:

  • Self-employment (known as being a self-employed sole trader).
  • Business partnerships.
  • Social enterprises.
  • Overseas companies.
  • Unincorporated associations.

But if a limited company is the best option for the business or professional, there are a few key steps to follow:

Choose a company name

Companies should choose a unique business name that’s not already in use by another organisation. The government offers a company name availability checker online that can be used to determine whether a preferred name is already taken.

Choose directors and a company secretary

Companies must have at least one limited company director, who is responsible for managing the company’s affairs and making decisions on behalf of the company.

According to the Chartered Governance Institute UK & Ireland, a company secretary has “considerable influence at the heart of governance operations within an organisation”. However, a company secretary is not a mandatory requirement for a limited company. 

Choose shareholders or guarantors, and identity PSC within the company

Shareholders effectively own the company and have a say in how it’s run. There can be one or more shareholders, and they can be individuals or other companies.

Guarantors are individuals who control the company, usually without taking any profit, and agree upon the guaranteed amount.

During this step, the company should also identify any people with significant control (PSC) over the company. This includes people with voting rights, or anyone with a number of shares amounting to more than 25% of the company’s total shares.

Prepare the necessary paperwork

Before registering as a limited company, businesses need to:

  • Create documents that outline how the company will be run. This includes details such as how directors are appointed and removed, how shareholder meetings are held, and how profits are distributed.
  • Prepare the memorandum of association and articles of association documents.
  • Set up any accounting and company records that are required.

Register the company

In the United Kingdom, limited companies can be registered via the Companies House website or by post. 

There are also formation agents that businesses can work with for support during the registration process.

Register for taxes

Most businesses can register for corporation tax when registering the business with Companies House. If not, though, they will need to register separately with HM Revenue and Customs (HMRC) after they’ve registered the company with Companies House.

What does company registration entail?

Registration of a private limited company requires some important details. At this stage, businesses need to provide information such as the

At this stage, it’s also a good idea to:

  • Set up a business bank account so that finances can be kept separate from any personal finances.
  • Create and maintain accurate records of the company’s finances, which will help when compiling annual accounts and the confirmation statement (also known as the annual return).
  • Register for Pay As You Earn (PAYE) to cover taxes and National Insurance contributions if the business plans to hire any employees.

After registering, the business will receive its certificate of incorporation, which confirms the company number and date of company formation.

It’s worth noting that the requirements are different in other countries, such as the United States, which request details such as the company service address.

How long does it take to set up a limited company?

Registration as a limited company in the UK usually takes 24 hours if completed online, or between 8 and 10 days if completed by post.

The advantages of running a limited company

There are a number of benefits to setting up a limited company. These include limited liability, easier access to funding – particularly when compared to other business structures, such as self employment – and tax benefits.

What is the difference between a limited company and a sole trader?

Unlike the owner of a limited company, someone registered as a sole trader – such as a freelancer – is personally liable for their business, including any debts or legal claims. For example, if a sole trader’s business ran into financial difficulties, their personal assets not connected to the business could be at risk.

Another key difference is around taxation. Limited companies pay corporation tax, while sole traders are taxed on their profits as part of their personal income tax return. 

Additionally, sole traders typically use their residential address as the company address.

Finally, sole traders are wholly responsible for their businesses. They have no shareholders or directors.

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