A limited company is the second most popular form of actively trading business structure in the UK. According to the Federation of Small Businesses (FSB), there are some 2 million actively trading limited companies, compared to around 3.5 million active sole traders.
In total, there are over 4 million limited companies registered with Companies House.
What is a limited company?
Limited companies are incorporated businesses that are limited by shares or guarantee. To break this down:
- Incorporated business – this means the company has its own legal personality. Since it’s a legal entity in its own right, the business (rather than its owners) can enter into contracts and be held accountable for any liabilities.
- Limited – companies that are limited by shares or guarantee limit the financial liability of their members (i.e. shareholders/guarantors) to the value of their investments or what they guarantee. So, unlike sole traders and partnerships, the owners of limited companies are generally not personally liable for the debts of the organisation.
Limited companies must be registered with Companies House and their details will then appear on the public register. There are various rules and regulations that limited companies must adhere to, most of which are set out in the Companies Act 2006.
What are the types of limited companies?
The vast majority of limited companies are private companies limited by shares. This is a non-public company whose ownership is structured through shares (even if this is just a single share owned by a sole director-shareholder). This type of company can retain profits after tax and distribute these to shareholders (e.g. via dividend payments). Other types of limited companies include:
- Private companies limited by guarantee – these are generally ‘not for profit’ organisations. Instead of having shareholders, this type of company is run by guarantors whose liability extends to a ‘guaranteed amount’. Any profits are invested back into the company.
- Public limited companies – these are similar to private companies limited by shares, but they must have a minimum allotted share capital of £50,000 (of which a minimum of 25% must be fully paid up prior to starting business). They can offer their shares for sale to the general public (e.g. on the stock market).
Limited Liability Partnerships (LLPs) are similar to limited companies but are generally considered distinct. Although LLPs are also incorporated businesses – both with their own legal personality and limited liability (although they do not have shares) – their structure is more akin to that of traditional partnerships.
What are the advantages of limited companies?
Aside from the core benefits of having their own legal personality and protecting their members from personal liability for debts incurred by the business, limited companies also have some other advantages:
- Tax efficiency – profits can be ploughed back into the business rather than necessarily being paid out as dividends and taxed.
- Raising capital – shares can be sold to generate new capital.
- Credibility – limited companies are sometimes seen as having a more professional image when compared with sole traders.
- Company name – once a company name has been registered with Companies House it cannot be used by another business.
There is generally more administrative work involved with setting up and running a limited company as opposed to starting out as a sole trader, but a company formation agent such as 1st Formations can help set up a limited company from only £12.99.