What is a Limited Company - Uniwide Formations
What is a Limited Company-1

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Welcome to this informative guide on limited companies. If you are thinking about starting a business in the UK then understanding the “ins and outs” of a limited company is essential. Whether you are a first-time entrepreneur or looking to expand your business, this guide will offer valuable insights into the world of limited companies.

Introduction to Limited Companies

limited company is a popular business structure in the United Kingdom whereby the owners, known as shareholders, have their liability limited to the amount that they have invested in the company.

  • Separate Legal Entity: It is essential to understand that a limited company is a legal entity which is separate from its owners. This means that the company itself can own property, hire employees and enter into contracts.
  • Limited Liability: Another crucial feature is the company’s limited liability. The company protects the shareholders’ personal assets: They are liable for the company’s debts only up to the amount that they have invested in it.
  • Ownership and Management: Shareholders own the company, whereas directors manage it. A single individual can be both a shareholder and a director.
  • Profits and Losses: After paying corporation tax, the company owns the profits and can distribute them to shareholders as dividends.

Types of Limited Companies

In the UK there are three primary types of limited company, each serving different purposes and business goals:

  1. Private Company Limited by Shares (Ltd): This is the most common type, suitable for a broad range of businesses. The company divides its capital into shares, which it distributes among its members. Each member’s liability is limited to the amount unpaid on their shares. Profit-driven businesses often use this structure.
  2. Private Company Limited by Guarantee: This type is common among charities, clubs and not-for-profit organisations. Instead of shares, members act as guarantors and agree to contribute a predetermined sum towards the company’s debts if it is wound up. It rarely (if ever) distributes profits and, instead, reinvests them in the company’s objectives.
  3. Public Limited Company (PLC): A PLC is suitable for larger businesses that want to raise capital by selling shares to the public. They have stricter regulatory requirements, including a minimum share capital and mandatory audits. PLCs can list their shares on a stock exchange, which enhances their ability to raise capital.

Furthermore, each of these types requires specific naming conventions:

  • A Private Company Limited by Shares must end its name with “Limited” or “Ltd”.
  • A Public Limited Company must include “Public Limited Company” or “PLC” at the end of its name.

Selecting the right type of limited company is crucial because it affects how you raise capital, your legal obligations and the perception of your business in the market. It is recommended that you seek professional advice to make an informed choice which aligns with your business goals.

Advantages of a Limited Company

Opting for a limited company structure comes with a plethora of benefits:

  • Limited Liability: This is perhaps the most significant advantage. Shareholders are only liable up to the amount they invested, safeguarding personal assets from company debts.
  • Professional Image: Having “Limited” or “Ltd” in your business name often imparts a more professional image, potentially attracting more clients and investors.
  • Tax Efficiency: Limited companies often benefit from more favourable tax rates and can claim a wider range of allowances and reliefs.
  • Separate Legal Entity: A limited company has its on “legal personality”, which allows it to enter into contracts, own property and sue or be sued in its own name.
  • Raising Capital: It’ i generally easier for a limited company to raise capital by issuing shares.
  • Ownership and Management Structure: Shareholders own the company, and directors can manage its day-to-day operations, which allows for an effective division of responsibilities.

In conclusion, the advantages of forming a limited company can often outweigh the administrative obligations involved, making it an attractive option for many entrepreneurs and business owners. It is important, however, to weigh these benefits against your specific business needs and goals.

Disadvantages of a Limited Company

  • Administration: There is more administrative work compared with being a sole trader.
  • Public Disclosure: Companies must file accounts and other information that becomes publicly accessible.
  • Less Control: Shareholders might have less control if shares are distributed among many.
  • Costs: Setting up and maintaining a limited company may involve higher costs.

Limited Company Formation Process

Forming a limited company in the UK involves several steps:

  1. Choose a Company Name: Devise or select a unique name which is not already in use by someone else. It should end with “Limited” or “Ltd” for private limited companies and “PLC” for public limited companies.
  2. Address: Register an official address for your company. This address must be in the UK and will be publicly available and visible through Companies House.
  3. Directors and Shareholders: Appoint at least one director and shareholder. The same person can hold both roles.
  4. Share Capital: Decide on the share structure. This includes the number of shares and their value.
  5. Memorandum and Articles of Association: Create these documents which set out the company’s written rules and objectives.
  6. Register with Companies House: Submit the necessary documents and pay the registration fee to Companies House. You can register online, by post, or through an agent.
  7. Set Up for Taxes: Register for Corporation Tax and, if applicable, VAT and PAYE.
  8. Open a Business Bank Account: It is crucial to keep business finances separate from personal finances.

Remember, this process involves legal obligations. It is advisable to take your time, understand each step and consider seeking professional advice or using a company formation agent to ensure a smooth registration process.

Shareholders and Directors Explained

Understanding the roles of shareholders and directors is vital when operating a limited company:

Shareholders

  • Definition: Shareholders are individuals or entities that own shares in the company. They are part-owners.
  • Role: Their main role is to invest capital in the company. They may also have a say in significant company decisions, such as the appointing of directors.
  • Liability: Shareholders have limited liability, which means that they are liable for the company’s debts only up to the value of their shares in it.

Directors

  • Definition: Directors are individuals whom the company appoints to manage its day-to-day operations.
  • Role: They make operational decisions, ensure that the company meets legal obligations and work towards the company’s objectives.
  • Liability: Directors have a fiduciary duty to act in the best interests of the company. They can be held personally liable if found to have acted negligently or fraudulently.

It is important to note that, in small businesses, the same person can be both a shareholder and a director. In larger companies, these roles are often separate, however, with shareholders delegating the management responsibilities to the directors. Transparency and good communication between shareholders and directors are crucial for the smooth running and success of a limited company.

Limited Company Taxation

Limited companies pay Corporation Tax on their profits. There are also other taxes to consider:

  • VAT: If your turnover exceeds the VAT threshold then you must register for VAT.
  • PAYE: If you employ staff then you must set up a PAYE scheme for income tax and National Insurance contributions.
  • Dividend Tax: Shareholders pay tax on dividends received.

What Taxes Do I Pay As a Limited Company?

Complying with legal obligations is essential for the smooth operation of a limited company:

  • Annual Accounts and Reports: Limited companies must prepare and file annual accounts and reports with Companies House. These documents provide an overview of the company’s financial activity and performance.
  • Corporation Tax: Within the first few months of operation, a limited company must register for Corporation Tax. The company must calculate its own tax liability and pay any Corporation Tax that is due.
  • Annual Confirmation Statement: This is a snapshot of general information about the company’s directors, shareholders and registered office. It must be filed yearly with Companies House.
  • Maintaining Records: Limited companies must keep accurate and up-to-date records of accounting and financial information, along with details about directors, shareholders and company secretaries.
  • Employment Laws: If your company employs staff then it is essential to comply with employment laws, which includes paying at least the minimum wage, ensuring workplace health and safety and adhering to anti-discrimination laws.
  • Data Protection: Limited companies that handle personal information must comply with data protection laws to ensure the privacy and security of that data.
  • Health and Safety Regulations: Ensuring the welfare and safety of both employees and clients is mandatory, as is compliance with health and safety regulations.

Failure to comply with legal obligations can result in fines, penalties and damage to your company’s reputation. It is advisable that you seek legal advice and ensure that you understand and fulfil all obligations to operate your business responsibly and within the confines of the law.

Maintaining a Limited Company

Maintaining a limited company requires continuous attention:

  • Bookkeeping: Keeping accurate financial records is essential.
  • Filing Returns: Timely filing of tax returns and annual accounts.
  • Updating Information: Notify Companies House of any changes in company details.
  • Compliance: Ensuring that the company complies with all legal requirements.

Closing a Limited Company

To close a limited company you must:

  • Settle any debts: Pay off any outstanding debts.
  • Distribute assets: Distribute any remaining assets among shareholders.
  • Deregister for taxes: Notify HMRC that your company is closing.
  • Apply to strike off: Apply to Companies House to have your company struck off the register.

This process can be complicated, so it is advisable that you seek professional help.


We hope this guide has provided you with a clear understanding of limited companies in the UK. Should you decide to form a limited company then Uniwide Formations, a UK company formation agency, offers a variety of services to assist you. Visit our Compare Company Formation Packages page to explore options tailored to your needs. Whether you are just starting out or looking to expand, making an informed decision is key to your business success. 

We are here to help you establish a limited company

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