Introduction to limited companies
A limited company in the UK is a type of business that is, legally, a separate entity from its owners and thus provides limited liability protection to its directors and shareholders. The limited company business structure is suitable for businesses of all types and scales, ranging from micro-entities up to billion-pound multinational organisations.
Limited companies are extremely popular in the UK, largely due to their ability to safeguard personal assets. In this guide we will explain what constitutes a limited company, the different types available, what is meant by limited liability, the process of forming a limited company and the roles and responsibilities of its directors and shareholders.
Main Points on Limited Companies
- Definition of a Limited Company: A limited company is a separate legal entity from its owners, providing limited liability protection to directors and shareholders, which safeguards personal assets from business debts.
- Types of Limited Companies in the UK: There are several types, including private companies limited by shares (Ltd), public limited companies (PLC), companies limited by guarantee, and limited liability partnerships (LLP), each catering to different business needs.
- Understanding Limited Liability: Limited liability means that owners are only responsible for the amount they have invested in the company, protecting personal wealth if the business faces financial difficulties.
- Forming a Limited Company Steps: Key steps include choosing a unique company name, deciding on a registered office address in the UK, appointing directors and shareholders, preparing necessary documents like the Memorandum and Articles of Association, and registering with Companies House.
- Roles of Directors and Shareholders: Directors manage the company’s operations and ensure compliance with legal obligations, while shareholders own the company through shares and have voting rights on important matters.
- Advantages and Disadvantages: Advantages of a limited company include personal asset protection, tax benefits, and increased credibility. Disadvantages involve more administrative responsibilities, regulatory compliance, and public disclosure of company information.
- Importance of Accurate Record-Keeping: Maintaining precise records is essential for legal compliance, transparency, and effective management. This includes keeping statutory records and filing necessary reports with Companies House.
What is a limited company in the UK?
A limited company in the UK is:
- A legal entity in its own right;
- Separate from its directors and shareholders;
- Able to enter into contracts in its own name and:
- Has the same rights and responsibilities as an individual.
The most important characteristic of a limited company in the UK is that its owners are protected from its liabilities and debts. This is referred-to as “limited liability”.
Limited companies in the UK are regulated by the 2006 Companies Act and their Articles of Association. By law, limited companies must regularly submit information about the business to Companies House (e.g. financial performance and details of directors and shareholders). This information is then made available on the public register for anyone to view.
What is meant by “limited liability”?
Limited liability means that the financial risk to shareholders is restricted to the amount that they have invested in the company. This is an important benefit for entrepreneurs, because it protects their personal assets from being used to settle debts that are owed by the business. If the company faces financial trouble then its shareholders are liable only for their shareholdings in the company, not for their personal wealth.
The extent of any liability depends on the type of limited company. Shareholders are liable only for the nominal value of the shares that they hold. The nominal value of a member’s shares represents however much that member is legally required to pay to cover the company’s debts if the business is wound up (e.g. £1 per share). For members of companies limited by guarantee, the extent of their liability is limited to the amount of any guarantee that they have made.
What are the types of UK limited companies?
There are several types of limited companies in the UK, each with different characteristics and purposes, as follows:
- Private company limited by shares (Ltd)
- Public limited company (PLC)
- Private company limited by guarantee
- Limited liability partnership (LLP)
Private companies limited by shares are the most common type of limited company in the UK. Under this model, ownership is divided into shares owned by shareholders. Private companies limited by shares are a great option for small to medium-sized businesses and are known for their simplicity and ease of management.
Public Limited Company (PLC)
A public limited company (PLC) can offer shares to the public and must have a minimum share capital of £50,000, of which 25% must be “paid up”. PLCs are generally more complex and require greater levels of transparency and legal compliance. This type of company is suitable for larger businesses looking to raise capital through public investment. They are, however, subject to stringent regulatory requirements, including the need to publish annual reports and hold annual general meetings (AGMs).
Private Company Limited by Guarantee
Private companies limited by guarantee have no shares. Instead, members act as guarantors who agree to give a predetermined amount towards the company’s debts if needed. This structure is normally used by non-profit organisations, clubs and societies in the UK. The personal liability of guarantors liability is typically limited to the amount they have guaranteed. This makes this business type a safe and stable structure for organisations that focus on community and charitable activities.
Limited Liability Partnership (LLP)
An LLP brings together the key elements of partnerships and companies. It offers limited liability to its partners, who can also participate in the management of the company. LLPs are particularly popular among professional services firms such as law firms, accountants and dental practitioners. They provide flexibility in management while also protecting partners’ personal assets.
What is involved in forming a Limited Company?
Starting a limited company involves several steps, each of which is crucial in order to ensure compliance with legal requirements and establish a solid foundation for the business. The key steps are as follows:
Choose a Company Name
Your company name must comply with the Companies House naming rules. It is important to ensure that the proposed name of the company is not the same as, or too similar to, the name of a company that is already registered. It must also contain the correct suffix (e.g. ltd) and cannot include certain restricted, sensitive terms such as “royal” or anything that might suggest a connection with the government. To check whether your preferred company name already belongs to another company you can use our free Uniwide name search tool.
Decide on your company’s Registered Address
A registered office address is essential for official correspondence and must be a physical location in the UK (i.e. not just a PO Box number). This is the address to which all official documents – including letters from Companies House, HMRC and other central government departments – will be sent. You can use a registered address provided by a third party, as long as you have their permission to do so. For example, a prestigious registered office address based in Kensington, London, is provided by Uniwide Formations.
Choose your directors and company secretary
You must have at least one director, but a company secretary is optional.
You must have at least one shareholder or guarantor. Shareholders and guarantors can also be company directors.
Prepare documentation
You will need to prepare your company’s Memorandum of Association and Articles of Association before it is registered. These documents set out the company’s structure and operating rules. The Memorandum of Association is a legal statement signed by all initial shareholders agreeing to form the company. The Articles of Association detail the company’s governance, including the responsibilities of directors and how decisions are made.
Registering your limited company
The next step is to incorporate (register) your limited company with the company’s registrar, Companies House. Although you could register your company with Companies House directly, many business owners prefer to use the services of a company formation agency such as Uniwide Formations to make the process as quick and easy as possible and to guarantee that everything is carried out correctly. In addition to helping to form your new limited company we also make it easy to meet your ongoing filing and reporting obligations, provide introductions to UK banks and accountants and offer the use of our prestigious registered address service for your company’s correspondence, together with various further services.
Once approved, the company receives a Certificate of Incorporation, providing confirmation of your company’s legal existence and its unique company number.
Steps to take once your company has been incorporated
Registering your new company is not the final step in setting up a limited company. You must also make sure that you create and keep any statutory records required. Accurate record-keeping is extremely important for your company’s legal compliance and transparency.
You may need to keep the following company records (this list is not exhaustive):
- Register of shareholders or guarantors
- Company directors and secretaries register
- Directors’ service contracts
- People with Significant Control (PSC) Register
- Minutes and outcomes of meetings
- Directors’ indemnities
- Contracts concerning purchasing own shares
- Records relating to the purchase or redemption of shares
- Register of debenture holders
- Register of mortgages or charges
It is the role of directors to manage the company’s operations and fulfil their duty to act in the company’s best interests, avoid conflicts of interest, act with transparency and exercise reasonable care, skill and diligence. Directors must also follow the company’s rules as set out in its articles of association, keep company records, report changes, file accounts and Company Tax Returns and pay Corporation Tax.
Corporation tax is currently set at the following rates:
| Rate | 2024 |
|---|---|
|
Small profits rate (profits under £50,000) |
19 % |
|
Main rate (profits over £250,000) |
25% |
|
Marginal Relief lower limit |
£50,000 |
|
Marginal Relief upper limit |
£250,000 |
|
Special rate for unit trusts and open-ended investment companies |
20% |
Shareholders own the company through their shares and have the right to vote on significant company matters and receive dividends. They also play a key role in the governance of the company by passing resolutions such as amendments to the Articles of Association or the appointment of new directors.
What are the advantages of a Limited Company?
Running and setting up a Limited Company in the UK offers a number of distinct advantages for the owner/s and the business. As outlined above, owners benefit significantly from knowing that, should the business get into financial trouble, any personal liability that they face is strictly limited. Owners can also structure how they pay themselves through a combination of salary and dividends.
From the standpoint of the business, the limited company structure provides enhanced credibility with suppliers, customers and investors and encourages greater confidence among stakeholders. Companies can also take advantage of various tax reliefs and allowances. In addition, it is easier to raise capital through the sale of shares and attract investment to facilitate growth and expansion.
What are the disadvantages of a Limited Company?
It is also important, however, to understand the disadvantages of a limited company. The other side of limited liability is the enhanced level of accountability and transparency. This includes the legal requirement to prepare and file accounts and annual returns, as well as to meet other statutory obligations (e.g. reporting). Carrying out these statutory tasks can be time-consuming and may require professional assistance. The setup and ongoing management of a limited company can also be more complex and costly.
Another consideration is that information about your limited company is available to the public, including financial performance and details of directors and shareholders. This may be of concern for some business people who would prefer to remain anonymous and not have their affairs made public.
Final words
A limited company offers many advantages, including limited liability, tax benefits and increased credibility. On the other hand, this does come with some more regulatory compliance and administrative responsibilities. Understanding the structure, formation process and ongoing obligations is crucial for anyone considering this business model.
Effective planning, compliance measures and management will help in leveraging the advantages of a limited company to drive your business’s success.
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 and we at Uniwide Formations will be happy to help and advise.
