A limited company is a specific type of company registration that offers investors and managers protection from liabilities incurred by the business. This is known as an incorporated structure and means the company has its own identity, responsibilities and rights in law.
This allows the company itself to sue or own its own assets, not its owners or investors. Ownership is divided into measures called shares and whoever purchases or receives these is called a shareholder.
What does a limited company mean?
- The company has its own financial management in place, but it’s not directly connected to the finances of the person(s) who run it (unlike a sole trader).
- The company is legally separate from its owners or shareholders and has its own rights and responsibilities in law.
Because of its special status, a company can keep any profits it makes (after any tax due to the government) has been paid.
The benefit of this arrangement is that the owners of a limited company are not personally responsible for the firm’s debts. The shareholders, on the other hand, do have a limited liability – usually the value of a person’s investment in a company or partnership.
The other big difference with a limited company (versus a sole trader) is that the owners may not run the business on a day-to-day basis.
Limited companies are driven by a Board of Directors who make management decisions for the company. This may include the owners but this is not specifically required.
Directors have a significant list of legal responsibilities in their practice and record-keeping. Failure to adhere to these standards can have you struck off from being able to hold this position in the future.
Here are the main features of the different types of company.
Private limited company – limited by shares
The most common type of a limited arrangement in the UK is limited by shares. These firms have a ‘share capital’, which is owned by its shareholders. The most a shareholder can be held responsible for in relation to the firm is the amount pending in return on their shares.
You can be a sole director of this type of company. The obligation to have a separate ‘company secretary’ was abolished under the terms of the Companies Act 2006.
Private limited company – limited by guarantee
This is where people who nominate themselves as “members” are guarantors for the business’s responsibilities, rather than shareholders. This is done by members agreeing to cover a certain amount if the company is wound up.
Non-profit organisations and charities often use this method and liability is often limited to just £1.
You can be a sole director of this type of company.
Find out more in our dedicated guide to guarantee companies.
Public limited company
The final type of limited companies are usually the largest of the bunch. These can offer their shares to members of the public, and have their stock listed on the stock exchange (providing they meet the stock exchange’s own rules for listing).
These structures are subject to some extra rules:
- A PLC must have at least two directors (though shareholders would usually expect even more than this), and the company secretary must be appropriately qualified to hold the post, and be prepared to complete and file all the paperwork needed by Companies House every year.
- The total share capital for the company must be of a value over £50,000. This can be in any combination of currencies as long as the total passes the required mark.
- This £50,000 must come from more than one source so there must be at least two shareholders.
This list of additional requirements means many firms do not enter the market as a plc. Instead there is a progression from being a standard limited company into a publicly traded firm as the business grows.
Private Unlimited Company
Under this fairly rarely used structure, the owners are financially responsible for the debts of the company. They may or may not have share capital.
Limited Liability Partnerships (LLP)
The LLP business structure is often used by accountancy and law firms.
It provides the same type of liability afforded by the standard private limited company structure, but does not require directors, or shareholders.
Typically run by a number of partners (2 or more), its members are taxed as ‘self employed’ individuals, rather than ’employees’ or directors.
Tax-efficient protection for directors
- Relevant Life Cover - pay via your limited company - save up to 50% compared to funding premiums personally
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- Professional Indemnity insurance for professional contractors - from just £13.50 per month via Qdos