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business-structure

What is Limited Company?

A limited company is a business structure that's legally separate from its owners. Your personal assets are protected if the business fails.

Example

You form 'Smith Consulting Ltd'. It's a separate legal entity - it owns assets, pays tax, and can be sued independently of you.

Key Dates

Company must be registered with Companies House

How Limited Company Works in Practice

A limited company is a type of business structure that creates a separate legal entity, distinct from its owners (shareholders) and managers (directors). The word 'limited' refers to limited liability -- the shareholders' financial liability is limited to the amount they invested in shares. If the company fails, creditors cannot pursue shareholders' personal assets (with some exceptions for fraud or wrongful trading).

There are two main types: a private limited company (Ltd) and a public limited company (PLC). The vast majority of UK businesses are private limited companies. A private company cannot offer shares to the general public and needs only one director (who can also be the sole shareholder). A PLC can sell shares on a stock exchange but must have at least two directors, a company secretary, and minimum share capital of £50,000.

Forming a limited company costs as little as £12 online through Companies House. You need to provide a company name, a registered office address, at least one director, at least one shareholder (who can be the same person as the director), details of shares (most start with 1 or 100 ordinary shares at £1 each), a memorandum of association, and articles of association (most use the model articles).

A limited company pays Corporation Tax on its profits at 19% (for profits under £50,000) or 25% (for profits over £250,000), with marginal relief between these thresholds. Directors typically extract money through a combination of salary and dividends, which is usually more tax-efficient than being a sole trader once profits exceed approximately £30,000-£35,000 per year. However, running a limited company comes with more administrative obligations, including filing annual accounts, a confirmation statement, and maintaining statutory registers.

Step by Step

Once incorporated, the company exists as a legal person. It enters into contracts, owns property, employs people, and pays taxes in its own name. The directors manage the company day-to-day and have legal duties under the Companies Act 2006, including duties to promote the success of the company, exercise reasonable care and skill, and avoid conflicts of interest.

The company must maintain a registered office where official correspondence is sent. It must file annual accounts with Companies House (within 9 months of the year end for private companies) and a confirmation statement (annually). It must keep statutory registers of members, directors, persons with significant control, and charges. Corporation Tax returns must be filed with HMRC within 12 months of the accounting period end, and tax paid within 9 months and 1 day.

Shareholders receive returns on their investment through dividends, which can only be paid from distributable profits (accumulated retained earnings). The company must hold a board meeting to declare dividends and prepare dividend vouchers. Shareholders vote on major decisions at general meetings, with voting power proportional to their shareholding.

Practical Tips

  • Open a separate business bank account immediately upon incorporation -- never mix personal and company finances
  • Set up payroll from day one even if your only employee is yourself -- running a small monthly salary is the most tax-efficient extraction method
  • Use an accountant or accounting software to stay on top of filing deadlines -- Companies House late filing penalties start at £150 and escalate to £1,500
  • Consider whether you genuinely need a limited company -- if your profits are low and you do not need limited liability, a sole trader structure is simpler and cheaper to run

Common Mistakes to Avoid

  • Treating company money as your own -- the company is a separate legal entity and mixing personal and business finances can lead to overdrawn director's loan account issues
  • Missing filing deadlines with Companies House or HMRC, resulting in automatic penalties that escalate over time
  • Not understanding that limited liability has exceptions -- directors can be personally liable for wrongful trading, fraud, or personal guarantees on loans
  • Incorporating too early when profits are low -- the administrative burden and costs of running a limited company may outweigh the tax savings if your profits are under £30,000

Frequently Asked Questions

When should I incorporate instead of being a sole trader?

The tipping point is typically when your annual profits exceed £30,000-£35,000. At this level, the Corporation Tax plus dividend tax combination becomes cheaper than Income Tax plus Class 4 NI as a sole trader. However, consider the additional admin costs and accountancy fees.

Can I be the sole director and sole shareholder?

Yes, a private limited company can have a single director who is also the sole shareholder. There is no requirement for a company secretary in a private company, though you can appoint one. You can also be a sole director with no employees.

What are the annual filing requirements?

You must file annual accounts with Companies House (within 9 months of year end), a confirmation statement (annually), and a Corporation Tax return with HMRC (within 12 months of the accounting period end). You must also run payroll if you pay yourself a salary.

What happens to the company if I die?

The company continues to exist as a separate legal entity. Your shares pass to your estate and can be transferred to beneficiaries. A new director may need to be appointed if you were the sole director, as the company cannot operate without one.

Can I convert from sole trader to limited company?

Yes, you can incorporate at any time. You register a new company, transfer your business assets and contracts to it, and begin trading through the company. Your sole trader business would then cease trading. There may be tax implications on the transfer of assets, so seek advice.

Source: Companies House guidance: https://www.gov.uk/limited-company-formation and HMRC Corporation Tax guidance: https://www.gov.uk/corporation-tax

Related Terms

Sole Trader

A sole trader is the simplest business structure - you and your business are legally the same. You keep all profits but have unlimited personal liability.

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