A limited company is a type of business that exists separately from its owners, making it one of the most popular business structures in the UK. It offers credibility, flexibility, and protection from personal financial risk - benefits that appeal to many business owners. In this guide, we’ll explain what a limited company is, its key features, and how to set one up.
What does limited company mean?
A limited company is a business structure where the personal financial responsibility of the owners (known as shareholders or members) is limited to the amount they invest or guarantee. In simple terms, if the business runs into debt or legal trouble, the owners’ personal assets - like their house or savings - are typically protected.
What is an ‘Ltd.’?
‘Ltd.’ is an abbreviation for ‘limited’ and refers to a limited company in the UK. A limited company is a business structure that limits the liability of its owners to the amount they've invested in the company.
Key features:
Separate legal identity: A limited company can own property, sign contracts, and be sued in its own name, independent of its owners.
Limited liability: Shareholders only risk losing what they’ve invested, rather than their personal assets.
Tax structure: Profits are subject to corporation tax rather than personal income tax.
Regulation: Limited companies must follow the Companies Act 2006 and are registered with Companies House, the UK’s official company registry.
What are the benefits of a limited company?
Choosing a limited company structure offers several advantages:
1. Limited liability protection
The main benefit is the protection of personal assets. If the company incurs debts, shareholders are only liable for their agreed investment or guarantee.
2. Professional image
Operating as a limited company often enhances a business’s credibility and professionalism. This can attract larger clients and investors.
3. Tax efficiency
Limited companies can often benefit from lower tax rates compared to sole traders. Directors of limited companies can take advantage of tax-efficient methods like dividends.
4. Separate legal entity
A limited company has its own legal identity. This means it can own property, enter contracts, and take legal action independently of its owners.
5. Ease of raising capital
Limited companies can issue shares to raise funds, making it easier to secure investment than other business structures.
6. Perpetual existence
The company remains operational even if shareholders or directors change, ensuring continuity.
Five types of limited companies
Limited companies in the UK come in various forms, each catering to different business needs and goals. Here's an expanded look at the five types of limited companies:
1. Private company limited by shares (Ltd)
A private company limited by shares is the most common type of limited company in the UK, often chosen by small and medium-sized enterprises (SMEs). Shareholders’ liability is limited to the amount unpaid on their shares.
Features:
Ownership: Shares are privately owned, usually by the company founders, family, or close associates.
Liability: Shareholders are only liable for the value of their investment.
Control: Decisions are made by directors who may also be shareholders.
Profit distribution: After-tax profits can be distributed to shareholders in the form of dividends.
2. Private company limited by guarantee (CLG)
A company limited by guarantee does not have shareholders. Instead, it has members who agree to contribute a nominal amount (usually £1) if the company faces insolvency. This structure is often chosen by non-profit organisations, charities, and clubs.
Features:
No shares: Members do not own shares, and the entity reinvests profits into the company.
Limited liability: Members’ financial risk is restricted to their guaranteed amount.
Non-profit focus: The structure is ideal for organisations prioritising social or charitable goals.
3. Public limited company (PLC)
A public limited company can sell shares to the general public through the stock exchange. This makes it a suitable structure for larger businesses seeking significant capital. However, it comes with stricter regulatory requirements compared to private limited companies.
Features:
Public trading: Shares can be bought and sold by the public.
Minimum share capital: Requires at least £50,000 in share capital, with 25% paid up.
Stringent regulation: Subject to detailed reporting and disclosure obligations under UK law.
Board of directors: Typically requires a more formal governance structure.
4. Community interest company (CIC)
Businesses that prioritise social impact over maximising profits use this structure. CICs are limited by shares or guarantee. But, they operate under special rules to ensure their activities benefit the community.
Features:
Social purpose: The company’s objectives must demonstrate clear community benefits.
Asset lock: Assets and profits are reinvested into the company’s social mission rather than distributed to shareholders.
Flexibility: CICs can adopt a structure that fits their operational needs, either limited by shares or guarantee.
5. Unlimited company
An unlimited company is rare in the UK. Business owners use this structure for specific scenarios where they are willing to accept unlimited liability. Shareholders are responsible for all debts and liabilities, with no limit to their financial exposure.
Features:
No liability cap: Shareholders can use their personal assets to settle debts.
Confidentiality: Unlimited companies are not required to publish financial accounts publicly. So, the structure offers a higher degree of privacy to owners.
Increased risk: Significant risk for shareholders makes this structure less appealing to most businesses.
FAQs
How does a limited company work in the UK?
A limited company operates as a separate legal entity. Shareholders invest in the company and hold ownership rights, while directors manage daily operations. Profits are subject to corporation tax, and after-tax profits can be distributed as dividends.
What is the difference between a corporation and a limited company in the UK?
💡Editor’s insight: “I often hear of people confusing the terms “corporation” and “limited company”. They are often used interchangeably, but in the UK, "limited company" is the standard term. A limited company can be private or public, whereas “corporation” is more commonly used in the US.”
What qualifies you to be a limited company?
To set up a limited company in the UK, you must:
Register the company with Companies House.
Have at least one director and one shareholder.
Provide a registered office address.
Submit a memorandum and articles of association.
Final thoughts
A limited company is a versatile business structure. They are most suitable for entrepreneurs and organisations seeking credibility and financial security. You can determine if a limited company is the right fit for your business by evaluating your goals and seeking professional guidance.
Looking for legal advice? Get in touch today for a free quote and to see how our small business solicitors can help.
References
Set up a private limited company from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.