Are you thinking about starting a business in the UK? If yes, then one of the first decisions is choosing the right legal structure. Therefore, you must know that a limited company is a business structure that is legally separate from its owners, giving the company its own rights and responsibilities.
But what is a limited company in business, how does it work, and is it the right choice for you? All these questions may seem hard to understand, right? Don’t worry, this guide explains the basics of a limited company in simple terms.
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What Is a Limited Company in the UK?
A limited company is a business registered with Companies House that has a separate legal identity from its owners. This means the company can enter into contracts, own assets, borrow money and be responsible for its own debts.
The owners are generally known as shareholders, while the people responsible for managing the company are its directors. A person can be both a shareholder and a director.
As its name shows, one of the main features is limited liability. Generally, shareholders are not personally responsible for company debts beyond the amount they have agreed to invest or owe on their shares, although there are exceptions, such as certain personal guarantees or wrongful conduct.
What Is a Private Limited Company?
After understanding what is a limited company, you should also know what a private limited company means. A private limited company, commonly called a Ltd company, is the most common type of limited company used by small and medium-sized businesses in the UK.
A private company cannot offer its shares to the general public. Its shares are normally held by its founders, family members, employees or private investors.
So, is a limited company a private company? Not necessarily. “Limited company” is a broader term. A limited company can be private or public. A private limited company usually ends with “Limited” or “Ltd”, while a public limited company uses “plc” or “public limited company.
What Are the Types of Limited Company
Learning about what is a limited company is incomplete without knowing about its types. So, the main types you may encounter in the UK include:
- Private company limited by shares – commonly used by commercial businesses.
- Private company limited by guarantee – often used by charities, clubs and non-profit organisations.
- Public limited company (PLC) – can offer shares to the public, subject to more extensive legal and regulatory requirements.
For many owner-managed businesses, a private company limited by shares is the most relevant option.
How to Set Up a Limited Company
Let’s suppose you got a deep understanding of what is a limited company, and now want to choose this business structure. Once you decide to incorporate, you generally need to follow the steps to set up a limited company in the UK:
- Choose an available and compliant company name.
- Decide who the directors and shareholders will be.
- Provide a registered office address.
- Prepare the company’s articles of association.
- Provide information about people with significant control (PSCs).
- Choose the appropriate SIC code for the company’s activities.
- Register the company with Companies House.
- Register for Corporation Tax and other taxes where required.
Companies House issues a certificate of incorporation once the company has been successfully registered.
How to Register a Private Limited Company in the UK
You can register a private limited company directly with Companies House or use a formation agent or accountant.
After learning what is a limited company, you will need information such as the proposed company name, registered office address, director details, shareholder information and the company’s business activity.
Company formation is only the beginning. After incorporation, directors must continue to meet their legal, accounting and tax responsibilities.
How Much Does It Cost to Open a Limited Company?
The cost depends on how you form the company and whether you use professional services. As only getting the definition of what is a limited company is not the end.
The Companies House incorporation fee is separate from any accountant or formation-agent fees. You should also consider ongoing costs, including accounting, payroll, bookkeeping, Corporation Tax returns and other compliance work.
Therefore, the cheapest incorporation option is not necessarily the cheapest overall option if you need ongoing professional support.
What Are the Benefits of Becoming a Limited Company?
There are several potential advantages of operating through a limited company:
Limited Liability
The company is legally separate from its owners, which can help protect personal assets from ordinary company liabilities.
Professional Image
Some customers, suppliers and commercial organisations may prefer to deal with an incorporated business.
Tax Planning Opportunities
A company pays Corporation Tax on its taxable profits, while directors and shareholders have their own personal tax considerations. Depending on your circumstances, there may be opportunities to plan how profits are extracted.
Tax efficiency should not be assumed, however. The best structure depends on factors such as profits, salary, dividends, pension contributions and how much money you need to take from the business.
Continuity
A limited company has its own legal identity, so it can generally continue operating even if ownership or management changes.
What Are the Advantages and Disadvantages of a Limited Company
Going for a new business structure, especially in the UK, should not be a random decision. It is not simply decided by understanding what is a limited company. So, you must go through all the pros and cons of operating through a limited company.
Advantages of a Limited Company
- Limited liability for shareholders in most circumstances.
- Separate legal identity.
- Potential tax-planning flexibility.
- Greater continuity than an unincorporated business.
- Potentially useful when bringing in investors or additional shareholders.
Disadvantages of a Limited Company
- More administration than operating as a sole trader.
- Annual accounts and other filings are required.
- Company information is publicly available through Companies House.
- Directors have legal responsibilities.
- Professional accounting and compliance costs can be higher.
What Are the Responsibilities of a Limited Company?
Running a limited company comes with ongoing responsibilities. Depending on the company’s circumstances, these can include:
- Keeping accurate accounting records.
- Preparing and filing annual accounts.
- Filing a confirmation statement with Companies House.
- Preparing and submitting a Corporation Tax return where required.
- Paying Corporation Tax by the relevant deadline.
- Maintaining accurate statutory company information.
- Reporting changes to directors, shareholders and PSC information when required.
- Meeting payroll, VAT and other tax obligations where applicable.
Directors are legally responsible for ensuring that the company meets its obligations, even when an accountant handles the day-to-day compliance work.
Who Is Responsible for the Appointment of a Statutory Auditor?
The company’s directors are generally responsible for appointing the auditor, where the company is required to have one.
After fully understanding what is a limited company, you should also know that not every limited company needs an audit. Many small companies can claim an audit exemption if they meet the relevant conditions. However, certain companies must have an audit because of their size, activities or specific legal requirements.
A company should therefore check its circumstances before assuming that an audit is either required or unnecessary.
Is a Limited Company Right for You?
There is no universal answer. A limited company may be suitable if you want limited liability, plan to retain profits in the business, expect the business to grow or want to bring in shareholders.
For a small business with relatively straightforward finances, remaining a sole trader may be simpler and cheaper. The decision should consider your expected profits, tax position, administration, business risks and long-term plans rather than simply choosing the structure with the lowest tax rate.
Need Help in Understanding What Is a Limited Company?
Choosing the right structure is only the first step. Professional accounting support can help with company formation, Corporation Tax, bookkeeping, payroll, annual accounts and ongoing compliance.
At CAIL, we have the best accountants to help you set up a limited company in the UK. Speak to our qualified UK accountant before incorporating if you want advice based on your individual circumstances and business plans.
From bookkeeping to VAT returns, we manage it all so you can focus on growing your business.
Final Thoughts
Understanding what is a limited company is essential before incorporating a business in the UK. A limited company provides a separate legal identity and can offer limited liability and greater flexibility, but it also comes with additional legal, accounting and reporting responsibilities.
If you are unsure whether incorporation is right for your business, getting advice before setting up the company can help you understand the tax and compliance implications and avoid costly changes later.