What is a Limited Company?

A limited company is one of the most popular business types in the UK, giving owners legal separation and personal protection from the liabilities of the company. No matter what type of business you are planning to start in the UK, forming a limited company offers important legal and financial advantages, as we will explore in this article. 

What is a UK limited company?

A limited company is a legal business structure that separates the business from its owners and directors while giving them the benefit of personal limited liability. As a separate legal person, a limited company can: 

• Own assets (e.g. property and machinery)
• Enter into contracts with customers and suppliers
• Employ staff
• Pay taxes in its own right

Limited liability means that any financial risk to shareholders is restricted to the amount they invest in the company. Personal assets such as your home or car are protected if the company gets into debt or litigation, provided there is no wrongdoing by the directors involved. For many business owners, this legal separation is the single most important reason to form a limited company in the UK. 

What are the types of limited company in the UK?

There are several types of limited company in the UK, including private company limited by shares, limited by guarantee and public limited company. The differences between each are as follows:

Type of UK limited company	Description
Private company limited by shares	This is the most common type of limited company in the UK. Shares held by this type of company are owned privately and cannot be sold publicly.
Limited by guarantee	Limited by guarantee businesses are typically used by charities or non-profit organisations. With this type of business, there is no share capital because members act as guarantors.
Public limited company (PLC)	PLCs can offer shares to the public via the stock exchange. Requires a minimum share capital of £50,000.

It is important to note that private limited companies (LTDs) are not just for large businesses; they can be used by single-owner operators, small and medium-sized businesses, national entities and multi-nationals. Public limited companies tend to be complex to manage and are mainly used by large corporations looking to raise capital from public investors.

How does a limited company work?

To form a limited company in the UK, you first need to register your new business with Companies House, also referred to as the process of ‘incorporation’ (please see below). Once your limited company has been successfully registered with Companies House, your company is assigned a unique company number and becomes a legal entity in its own right.

Limited companies have shareholders and directors. 

• A shareholder is someone who owns a share in a limited company and can invest capital and receive dividends if the company makes a profit. 
• Directors are people responsible for running the company and ensuring legal compliance with the Companies Act 2006 and the rules defined by Companies House and HMRC. A director can also be a shareholder.

Limited companies are legally required to file annual accounts, maintain company records, and pay corporation tax on profits.

Any profit that remains after corporation tax has been paid can then either be distributed to shareholders or reinvested into the business (e.g. to buy new equipment).

What are the advantages of a UK limited company?

Forming a limited company in the UK offers several distinct advantages:

• Limited liability – limited liability protects the personal finances of shareholders because they are only liable for the amount they have invested.
• Tax efficiency – limited companies typically benefit from more tax-efficient arrangements compared to sole traders. Corporation tax is paid on profits, which is generally lower than the rates of income tax paid by sole traders. Company directors also have the option to draw a modest salary and add to their income with dividends, which can result in a lower overall tax liability.
• Can project a more professional image – simply having the letters ‘LTD’ after your business name can add credibility and build trust with your customers, suppliers and investors.
• Easier to raise funds – a limited company can issue shares and may attract external investors.
• Perpetual succession – a limited company continues to exist even if the original owners or directors leave or pass away.

What are the disadvantages of a UK limited company?

There are some disadvantages of limited companies to be aware of, as follows:

• More administration – to comply with the law, you will have to file annual accounts, confirmation statements, and maintain statutory registers, among other important tasks
• Public disclosure – company information, including directors’ names and financial accounts, is available to the public via Companies House
• More costs – there are setup and ongoing costs, including filing fees and accountant fees.
• Greater overall complexity – as a company director, you need to comply with the Companies Act 2006 and HMRC requirements, which can be time-consuming and increase the risk of non-compliance if you lack experience.

What are the main differences between a limited company and a sole trader?

The main differences between the two most popular business types are as follows:

Feature	Limited company	Sole trader
Legal status	Separate legal entity	Not separate from the owner
Liability	Limited to the value of investment	Unlimited personal liability
Taxation	Corporation tax and dividends	Income tax is payable on all profits
Personal privacy	Public disclosure is required	No public disclosure required
Ongoing costs	Higher	Lower

In essence, while a sole trader setup is simpler and cheaper to run, it offers no personal liability protection for the shareholders. Limited companies, on the other hand, are more complex but offer greater protection and long-term flexibility. With that said, a trusted accountant will handle most of your financial accounting and filing requirements, allowing you to focus on your business. 

How can I set up a limited company?

When it comes to how to set up a limited company, there are two main methods: ‘Do it yourself’ (DIY) or through a formation agent such as Uniwide Formations. Regardless of the method you choose, the general process of incorporating a company remains the same; you will need to:

• Choose your company name – it must not be too similar or the same as another registered company. To make this process easier, we offer a company name check service on our website.
• Appoint at least one director – they will be responsible for managing the company and ensuring its legal compliance.
• Decide on your company shareholders – you must have at least one shareholder who can be the same person as the director.
• Allocate shares – decide how many shares to issue to shareholders and their value.
• Prepare your Memorandum of Association and Articles of Association – these foundational documents define how your company will be run. We can draft these for you based on your needs.
• File your company registration application online or through a company formation agent
• Pay the application fee
• Register for Corporation Tax with HMRC.

Most companies can be formed within 24 hours when registered online; however, we provide a same-day service if your application is placed by 1.30 pm Monday to Friday and you have passed our ID verification checks. 

What are the duties and responsibilities of directors and shareholders?

Directors and shareholders play different roles, and their responsibilities are clearly defined under UK company law.

Directors must:

• Act in the company’s best interests at all times
• Keep proper financial records
• File annual accounts and confirmation statements
• Ensure the company pays taxes on time
• Report changes in company structure or officers

Shareholders (who can also be directors):

• Own part of the company
• Vote on important company decisions
• Can appoint and remove directors
• Receive dividends

In small businesses, directors and shareholders are often the same individuals.

Ongoing compliance and reporting

Once your company is formed, you must meet ongoing reporting and compliance duties:

• Annual accounts – your limited company annual accounts must be filed with Companies House within nine months of the end of your financial year.

• Confirmation statement – this document confirms key company details held by Companies House and must be submitted at least once a year.
• Corporation Tax return – Must be filed with HMRC, along with full company accounts.
• Maintain statutory registers, including the:
  • Register of members (shareholders)
  • Register of directors
  • PSC register (People with Significant Control)
• Report changes – you must notify Companies House of any changes to directors, registered address, or share structure. 

Is a limited company the right choice for my new business?

Incorporating as a limited company may be the right choice for your needs if:

• You want to protect your personal assets from business risks
• You may need to raise investment or attract partners
• You expect to earn above the Income Tax threshold
• You want a professional business image for your customers, suppliers, and investors
• You want a clear separation between personal and business finances

Consider that the business you have now may grow and expand considerably in the coming years. While a sole trader structure may meet your immediate needs, it may be advantageous to start as a limited company from the outset.

Final words

By registering a limited company in the UK, you will benefit from valuable legal protection, tax advantages, and a structure that will attract clients, suppliers, and investors. Limited company directors must also be aware of their requirement to comply with statutory obligations and ensure timely filings. If you are still not sure, we recommend getting professional advice from an accountant or company formation agent who can guide you through the process and ensure your business gets off to the best possible start. 

You Might Also Like:

• An Introduction to Company Formation in the UK
• Everything You Need to Know About Limited Liability
• Private vs Public Limited Companies – What’s the Difference?