What is a Limited Company?

Chris Andreou

April 27, 2021

what is limited company guide

Free Download: Registering a Limited Company Guide

Download Now ↓
Limited Company

Introduction

Limited companies provide numerous benefits, from tax savings to limiting your liability.

But the first step is to understand what a limited company is exactly, and whether setting up such a company can help you achieve your goals. This article will clearly explain the pro's and con's so you can make an educated decision.

In a nutshell, a limited company is a private company that's a separate legal entity from its owner(s). For freelancers and contractors, a limited company is one of the three main business structures that you may use to run your business (the others being sole trader and umbrella companies).

In this article, we walk you through:

  • What a "separate legal entity" means
  • The different types of Limited Companies
  • The pros and cons of setting up a Limited Company
  • How to start a Limited Company

What does "separate legal entity" mean?

New company director signing limited company documents

Limited companies are companies that have been incorporated at Companies House as a separate legal entity. Basically, what this means is that the company exists and operates independently to the owners of the business, and it can enter into contracts under its own name.

How does this benefit the owner of the company?

Well, companies that are separate legal entities are protected by limited liability, meaning that the owners are only liable for the business debts up to their original investment in the business.

In other words: if you invested £10,000 to start your company, and you later on accumulate £50,000 worth of debt that are you unable to repay, you'll only be liable to pay £10,000 worth of that debt—assuming you've set up a Limited Company.

On the other hand, if you're a sole trader, your business operations are linked to you as an individual. If you overrun with debt or legal woes as a sole trader, there is no escaping those liabilities, you'll personally be on the hook for every penny.

At the end of the day, limited liability provides huge protection for business owners, particularly when legal action is taken against their company. The same applies in cases of insolvency where business owners aren't able to pay off their debts.

Registering a Limited Company Guide

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Registering a Limited Company Guide

The different types of Limited Companies

Three hot air balloons showing three benefits

Here in the UK, there are three types of limited companies:

  • Private and limited by shares
  • Private and limited by guarantee
  • Public limited company

In this section, we'll discuss each type of Limited Company, and explain how they work.

Private and Limited by Shares

These are by far the most common limited company, and they're an excellent choice for freelancers and contractors who want to start companies. 

"Limited by shares" means that the company is divided into shares, and the shares are distributed amongst shareholders with the same monetary value attached to each share. These companies must have at least one shareholder, but there's no upper limit or maximum number of shareholders.

Here's an example: if you're a freelancer setting up your own business, you own 100% of the company, and you'll be liable for whatever amount you've invested in the case of insolvency. If you're setting up an agency with a friend, and each of you put £5,000 into the business, you'll each be liable for £5,000.

When setting up a private company that's limited by shares, shareholders have to appoint directors to manage the day-to-day business activities on their behalf. Assuming you're just a one-man show at this point, just appoint yourself as a director—that will do the trick. 

Private and Limited Guarantee

This setup is most commonly used by non-profits who reinvest their profits back into the organisation, and it involves guarantors instead of shareholders. 

Like private companies that are limited by shares, private companies that are limited by guarantee are seen as separate legal entities that are responsible for their own income, assets, debts and liabilities.

That said, since this type of company does not issue any shares, there are no shareholders in the picture. Instead, companies that are limited by guarantee are owned by individuals who are called guarantors.

Now, you might be wondering, how does liability work in this case?

Here, a guarantor's personal liability isn't limited to their original investment. Instead, it's limited to a fixed amount of money called a "guarantee". If your guarantee is £8,000, for instance, then that's what you'll pay in the case of insolvency. 

Like shareholders, guarantors are required to appoint directors to manage the day-to-day affairs of the company. Again, it's possible (and common) for guarantors to appoint themselves as directors, so you don't have to scratch your head over finding someone to be your director.

Public Limited company

When a private company limited by shares grows large enough, the company's owners or shareholders might choose to take the company "public" in an Initial Public Offering (IPO). When this happens, the company will be classed as a Public Limited Company. 

These companies' shares are available for trading on stock market exchanges such as the FTSE 500 or the Nasdaq. This means that the company's shareholders are able to sell their shares to the public.

Generally speaking, Public Limited Companies are more complex to run compared to Private Companies.

For one thing, Public Companies are required to have at least two directors and hold annual general meetings (AGMs). On top of that, it's also mandatory for Public Companies to publish information about its financial health so that shareholders and potential shareholders have clarity about the value of their stock.

Advantages of using a Limited Company

Umbrella showing legal liability benefit

There are three major advantages and two disadvantages of limited companies.

In this section, we'll walk you through these benefits and drawbacks, so you can decide if a limited company is a good fit for you.

Advantage 1: Owners aren't (fully) liable

One of the biggest advantages of a limited company is that the owners or shareholders aren't fully liable if someone takes legal action against the company (or if the company becomes insolvent).

Think of it this way: if you're a sole trader, and someone sues you for hundreds of thousands of pounds and you lose the case, this could very well bankrupt you which will have devastating consequences on your personal life.

If you own a limited company, on the other hand, you'll only have to pay the amount you've invested. It can be the difference between losing everything and losing a manageable amount of money.

Advantage 2: Tax savings

On top of that, setting up a limited company allows you to save on taxes (and who doesn't like saving on taxes)?

More specifically: where sole traders pay 20% to 45% income tax on all taxable earnings, owners of limited companies pay a flat rate of 19% corporation tax on their profits. And this 19% can be lowered substantially through dividends and expenses. Use our online calculator if you would like to see an example of the tax savings of using a limited company over a sole trader.

Advantage 3: Professional image

Finally, using a limited company structure increases the legitimacy of your business, and provides you with a more professional image to external customers and suppliers.

On a related note, clients who are looking to work with you on a long-term basis can hire your business instead of you, making it a much simpler transaction for them.

Disadvantages of using a Limited Company

Disadvantages of limited company

Disadvantage 1: Additional filing and reporting requirements

A limited company is subject to additional filing and reporting requirements.

Amongst other things, you (or your accountant) will have to keep accounting records about: 

  • All money received and spent by the company
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • The stock takings you used to work out the stock figure
  • All goods bought and sold
  • Who you bought and sold them to and from (unless you run a retail business)

Most owners choose to outsource these to an accountant, although you're welcome to tackle these yourself if you have a knack for accounting.  

Disadvantage 2: Reduced privacy

Another disadvantage of setting up a limited company is that your company information will be disclosed on public record. This means anyone will be able to look up details of your directors and owners. 

Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company

A final word on setting up a Limited Company

If you're going into business on your own, it's important to cover all your bases and make sure you're protected under all circumstances. That's where limited companies come in. 

While there are some disadvantages associated with Limited Companies, these are far outweighed by the benefits, and for most business owners, it still pays to set up a limited company (as opposed to simply working as a sole trader).

At the end of the day, starting a business is a huge step. That's why setting up a limited company is important—it allows you to be confident that you won't be left floundering in the event that things go south, and lets you benefit from potentially large tax savings at the same time.

Get Free Advice from an Accountant

Book a free 30 minute call with an accountant. We'll help walk through setting up your business, switching accountant or any of your tax queries. All our accounting packages come with a free 30 day trial.

what is contractor guide
Featured Article

What is a Contractor?

We'll explain what it means to be a contractor, the different types of contractor employment, contractor business structures and factors that identify a contractor.

Read more

Read More Guides below:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

5 advantages of a limited company

The advantages of operating as a limited company are well known. It can be a great way to maximise your take-home pay, improve your credibility with customers and limit your personal liability. Like most things in life, it's a case of what's best for your situation. While the positives outweigh the negatives for most people, there are a few things you should know before you make the jump to a limited company.

In this article, we'll outline the disadvantages of operating as a private limited company. Bear in mind that there are many advantages to a limited company and in many cases, these advantages will outweigh the disadvantages, so don't think of this as a report of doom and gloom.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Registering a Limited Company Guide

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

How to set up a Limited Company

When you set up a limited company, you'll enjoy many advantages you don't get as a sole trader. Not only is it a tax-efficient way to run your business, it's also a great way to limit your personal liability and increase your credibility with customers. Additionally, it could open new avenues of work that wouldn't be open to you if you were operating as a sole trader, especially some contractor roles.

One of the disadvantages of running a limited company is that it involves a lot of paperwork, but with the help of this guide, we'll clear away the jargon and tell you exactly what you need.

If you're unsure about whether a limited company is right for you, check out our handy article comparing the differences between Limited companies and Sole Traders to see which business entity is right for you.

If you've got more important things to do than dealing with extra admin, you can always take advantage of one of our accountancy packages and we'll do all the forms and applications for you.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

5 disadvantages of a limited company

What are the advantages of a private limited company?

In the UK, the majority of self-employed people operate as sole traders. While there are many advantages to being a sole trader, you could take home more money and give your business a professional edge by setting up as a limited company.

In this article, we'll look at the advantages of operating as a private limited company to see how it could benefit you. If you're interested in seeing whether a limited company could be a good option for your business, check out our Business Structure guide. If you're already operating as a sole trader, making the jump to a limited company is more straight forward than you think.

Advantage 1 ‚- You pay less tax and National Insurance Contributions

Who can turn their nose up at the prospect of increased take-home pay? Well, that's the principle benefit of setting up a limited company and one of the main factors that drive people to switch from a sole trader.

As a director of a limited company, the way you pay tax is different from how you pay as a sole trader. As a sole trader, you'll pay 20% or more on everything you earn over the tax threshold. As a limited company, you typically pay yourself a small salary so you incur as little personal tax as possible. The majority of your income will come in the form of dividends that are taxed at a much smaller rate, meaning you're able to maximise your take-home pay.

As well as the tax benefits, paying the majority of your income through dividends means that you're able to pay less National Insurance Contributions (NICs) as these do not apply to dividend payments.

Example - Here's a quick comparison of the difference in take-home pay for a sole trader and a limited company.

  1. Sole Trader
    Revenue: £40,000
    Expenses: £1000
    Tax at 20%: £5,300
    Class 2 NIC: £158.60
    Class 4 NIC: £2,655
    Take-home pay: £30,886.40


  2. Limited Company
    Revenue: £40,000
    Expenses: £1000
    Corporation tax: £5741.04
    Dividend tax at 7.5%: 1,406.92
    Take-home pay: £ 31,852.04

As you can see, you save £965.64 as a limited company. What's not to like?

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

When do I need a Limited Company?

There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.

With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

What are the disadvantages of a Limited Company?

The drawbacks to setting up a limited company include:

  • There are additional filing and reporting requirements to adhere to.
  • Reduced privacy
Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Sole Trader vs Limited Company

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

What type of business structure is best for you?

If you're looking to the future with the hopes of beginning a journey running your own startup, chances are you're feeling some mixture of excitement, trepidation, and uncertainty when it comes to the finer details of your plan.

Starting your own business is an immensely fulfilling process and an excellent means to flex your creative muscles, but there's a lot of humdrum of business behind the process of turning a vision into a dream.

One of the most important (and one of the earliest) decisions in this process will centre around your business's formation. You'll have to select which type of business structure best suits your goals for the future.

While the choice may sound easy, you'll be well-served by giving the decision ample consideration. The business structure you select will have measurable implications on the way you make money and do business. It'll impact:

  • How much tax you pay
  • Your degree of personal liability should the business fail
  • How much administrative work is involved in the business (both before it comes to fruition and over the course of its life)
  • Your ability to finance and fund your efforts

If you make the wrong selection when it comes time to choose a business structure, you could be faced with a myriad of complications in the future.

Paying professionals for guidance and advice once things go wrong is costly and, for many, an embarrassing affair-performing research well in advance will ensure you're making the best choice for your company and that you can avoid losing out on money or pride later on.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

3 Ways to Register Your Company for Free

Registering a company is a one off cost of £12 and done through Companies House. However, there are a few different ways that you can get this fee waved with other business services that you need.

We'll walk you through how to register your company for free and the perks that you'll get with each.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

How do I register a limited company?

There are a couple of ways to go about registering a limited company:

  • Register directly through Companies House
  • Go through a third party: An accountant or company formation service can help you process your application, significantly lessening your admin burden. Beyond the application, a good third-party service can also provide accounting advice, help you fulfil your filing obligations and assist with other admin tasks.

We've included further details in our guide on setting up a limited company.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

What are the advantages of a Limited Company?

The advantages to setting up a limited company are:

  • Owners aren't fully liable
  • Tax savings
  • Using a limited company structure lends credibility to your business
Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

What are Personal service companies?

While there isn't a legal or formal definition of the term, personal service companies (PSC) refer to limited companies that are owned by a contractor, who is also the only shareholder and sole director. In some instances, the company may also be owned by a very small group of individuals.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

When do I need a Limited company as a contractor?

There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.

With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Key considerations when you register a Limited Company

As a freelancer, contractor, or small business, it is typical to start with the simple structure of operating as a Sole Trader.

While taxes and other administrative work may be relatively easy when you are a Sole Trader, as your volume of business goes up, there are more and more reasons to take on the task of becoming a Limited Company.

For instance:

  • A Limited Company protects your personal assets. If you are found liable in a lawsuit, only your business assets are at risk.
  • A Limited Company is usually more tax efficient than being a Sole Trader.
  • Once you have your name chosen as a Limited Company registered through Companies House, no one else can take your company name.

Luckily, running a Limited Company doesn't have to be exceedingly complex, though following a set plan will help to keep the complexity to a minimum.

Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

How do I set up a Limited Company?

To set up a limited company, you need to take the following steps:

  • Decide what kind of limited company you need
  • Choose a business name
  • Choose how to set up your limited company
  • Complete the company formation process
  • Open a business bank account
  • Inform your stakeholders
  • Get your VAT registration or transfer sorted out
  • Set up your payroll
Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

How do I register my business?

To register a business as a sole trader, you need to:

Once you've registered, you need to fulfil your responsibilities as a sole trader. These include:

  • Keeping records of your sales and expenses
  • Submitting a Self Assessment tax return each year
  • Paying income tax and National Insurance Contributions

To set up a limited company, you need to:

  • Decide what type of limited company you need
  • Choose a business name
  • Choose how to set up your limited company
  • Complete the company formation process
  • Open a business bank account
  • Inform your stakeholders
  • Get your VAT registration or transfer sorted out
  • Set up your payroll
  • Update your company details
  • Get your books sorted out

To set up a business partnership, you need to:

  • Choose a business name
  • Choose a ‚Äònominated partner'
  • Register with HMRC
Read Full GuideRead Full GuideCalculate Now

Download Now:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Registering a Limited Company Guide

Speak to an Accountant