What you should know...

Companies limited by shares, more commonly referred to as limited companies, account for most private companies registered in the UK. This company structure is particularly popular as the company exists as a separate legal entity from the individual owner.

This means the owners have limited financial liability, so their personal finances are protected if the company encounters financial problems.

Limited liability is a major benefit over the sole trader structure whereby the sole trader is liable for business debt. This page provides all of the need-to-know information about private companies limited by shares.

Benefits of companies limited by shares

  • Limited financial liability – Shareholders’ personal finances are protected and they are only responsible for company debts up to the nominal value of their shares.
  • Incorporated status will greatly improve your professional image and business profile. Limited companies are often more appealing to prospective clients and investors, giving the impression of a well-organised, established, and reputable business.
  • You can choose to sell shares in your company at any time to raise additional capital or grow the business.
  • Another company can be a shareholder or director in a limited company. However, there must always be at least one natural (human) director. Please note: legislation has recently been passed to ban corporate directors, which is currently being implemented.
  • Ownership of a limited company can be passed on. As the company exists as a separate legal entity from the individual, the company can continue to exist even in the event of the owners’ death – unlike a sole proprietorship.
  • When you register a company name, it is protected and cannot be used by any other limited company or LLP, nor can another company register a name that is the same as, or too similar to your own company name.

Forming a company limited by shares

Incorporating a company limited by shares is incredibly simple.

Here is what you need to know about the process of setting up a company limited by shares and some key points about maintaining your business after company formation:

  • All companies limited by shares must be legally registered with Companies House, the official Registrar of Companies in the UK.
  • You must have a unique company name to get approval from Companies House.
  • You must have a registered office address – this is the official address of the company which will appear on public record. This must be a full physical address (not a PO Box Number) in the same country (jurisdiction) as the company is registered.
  • You require a minimum of one shareholder and one director to set up a company limited by shares. The same person can hold both positions.
  • Standard Industrial Classification (SIC) codes must be included to describe the business activities that your company will engage in. You can provide a maximum of four codes.
  • Details of all People with Significant Control (PSCs) in the company must be included on the application. In most companies, the PSCs are the shareholders.
  • On incorporation, Companies House will issue a memorandum of association to state the names of the first shareholders (known as the 'subscribers') and their intention to form the company and take at least one share.
  • A governing document called the articles of association must be adopted during the company incorporation process - this outlines the rules and regulation of the company and its members and officers.

Frequently asked questions

What are the advantages of this type of company?

The most significant benefit is limited liability for company shareholders. Their obligation to pay for business debts is restricted to the nominal value of their shares. This means their personal assets – property, car, finances etc. – are secure and cannot be used if the company becomes insolvent. Sole trader businesses do not have this benefit, and the owner is personally responsible for any business debts.

The other benefits of this type of business structure are enhanced professional status, and the ability to effectively plan your company's finances to take advantage of any favourable tax rules.

What is the difference between a sole trader business and a company limited by shares?

Sole traders can employ people to work for them, but the sole trader is wholly responsible for the business and its debts. This is unlike limited companies, as there is no legal distinction between the sole trader business and the individual.

Sole trader accounts are relatively simple compared to limited company accounts and no information about the business or the sole trader is made available to the public.

Limited companies register for Corporation Tax with HMRC, file Company Tax Returns, and pay Corporation Tax on any profits made.

They must prepare and file detailed financial accounts and company records for Companies House and HMRC each year. Information about a company, its directors and shareholders, and its financial accounts are all made available to the public.

Who can own a company limited by shares?

Any person or corporate body can own a company limited by shares. The owners are known as ‘shareholders’, ‘members’ or ‘subscribers’ and they will appoint directors to run the day-to-day activities of the company. In many cases, the shareholders will also be directors in their company.

How many people are needed to set up a company limited by shares?

Only one person is required to register and run this type of company. You must have at least one shareholder and one director but the same person can hold both of these positions.

How do I register a company limited by shares?

1st Formations offers online company registration services – simply choose a company name, select one of our five limited by shares formation packages and complete our quick application form with details of your new limited company.

We will send your application electronically to Companies House and your new company will usually be ready to trade within 3 to 6 working hours.

What reporting and filing requirements do private limited companies have?

Limited companies have more filing and accounting responsibilities than sole trader businesses. They are required to file a confirmation statement and annual accounts to Companies House each year.

If the company is trading, it must also file a Company Tax Return and statutory accounts with HMRC and pay any Corporation Tax due.

A confirmation statement is a document containing details about your company at a certain date. This is used by Companies House to confirm and maintain the accuracy of their records and the information that is displayed on public record.

Annual ‘statutory’ accounts contain information about your company’s financial activity throughout the year – sales, expenditure, assets and liabilities. This must be filed with Companies House, and as part of the Company Tax Return for HMRC.

Company Tax Returns must be filed with HMRC if your company is actively trading. Your tax return will determine the amount of Corporation Tax you must pay.

You must also report any significant changes to your limited company to Companies House and, in some cases, HMRC.