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What is a limited company?

A guide for contractors, entrepreneurs and other business owners in the UK

Limited Company Definition:

A limited company is the most common form of business structure. It’s a legal structure whereby the shareholder is protected from any liabilities the company may incur. Meaning it’s a separate entity for income tax and legal purposes from its shareholder(s) and director(s).

Limited companies in the UK are governed by the rules and regulations contained in the Companies Act 2006, and all company registration and records are managed by Companies House.

If you’re looking to set up your own limited company, or are simply looking for a new limited company accountancy service, then PayStream can help. View your options here.

Why should I set up a limited company?

A limited company allows you to pay yourself a mixture of salary and dividends, however if applicable you may need to consider IR35. You can also claim tax relief on allowable business expenses.

Incorporating your business is a big step and we recommend you discuss your circumstances with your accountant, like PayStream, to ensure it’s the right next step for your business.

Once decided, it’s relatively easy and straight forward to set up your own limited company, the tricky and time consuming part of running your own limited company is understanding your director responsibilities, the administrative aspects, as well as understanding how to complete and file your statutory returns accurately and on time to avoid any penalties. With the support and advice from our dedicated team here at PayStream, you'll get the best advice that is tailored to your business.

Limited Company FAQs

In the UK there are a handful to choose from depending upon your circumstances.

Private and limited by shares

This is the most common and popular form of small company. The liability of the company is limited to the value of the shares. The shares are not publicly available (hence the name ‘private limited company’). Only a small number of shareholders, often individuals, are normally involved.

Private and limited by guarantee

This type of company often has a range of members involving a mix of individuals and organisations. The liability of this type of company is limited to a pre-determined guarantee of debts which the participants agree to cover. It is frequently used by charities as a trading arm.

Public limited company (plc)

As the name suggests this type of company’s shares are traded publicly and can be seen on Stock Exchanges. Sometimes ‘plcs’ contain different types of shareholdings which come with different rights and entitlements as to income and capital distributed by the plc.

A ‘plc’ is often used by private limited companies as they grow and provide a good platform for founders to sell their shares. They are a popular format for raising external funding for growth.

Yes, that is quite common way of working in the contracting and other industries.

A private limited company is probably best suited for what is known as an Owner Managed Business (OMB).

This type of company has a great deal of flexibility, minimum levels of administration and with a simple structure and set up process which begins with the Issue of shares in the company and shareholders appointing directors.

Simple start- up businesses usually consist of one director with one share.

Its flexibility makes it straightforward to add new directors and acquire new shareholders.

A private limited company is a legal structure in which the liability of the shareholder or shareholders is limited to their individual investment. If a company has a single shareholder who paid £1 for his share, then that is the extent of his liability in the event of the company failing.

Many UK businesses initially choose this type of structure and make up what are known as SMEs (Small and Medium Enterprises), the most numerous business type in the country.

It’s important to understand that the company is a distinctly separate legal entity from the individual who may have been a sole trader prior to incorporating his business.

The private limited company, in common with the other types already described are governed by the regulations set out in the Companies Act 2006. All company registrations and the statutory reports and filings are made online to Companies House.

Every limited company has to have detailed Articles of Association. They are needed to form the company and detail how the company is to be run.

There are ‘model’ or default articles available or you can write your own.

Information about shareholdings, what business activities the company can engage in and the way in which the company’s administrative business is organised are contained in them.

It is the responsibility of the director, or board of directors if there are more than one, to manage the company’s business. They make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its various statutory obligations.

There are 7 common duties:

  • To act within their powers under the company’s constitution (the Articles of association set these out)
  • To promote the success of the company
  • To exercise independent judgement and form their own view of the company’s activities
  • To exercise reasonable care, skill and diligence
  • To avoid or manage conflicts of interest which may affect their objectivity
  • To disclose any direct or indirect interest in proposed transactions or arrangements with the company
  • To ensure that proper records of the company’s decision-making process (usually recorded in the Board of Directors’ minutes of meetings)

In one-person companies many of these will inevitably flow from the director’s own interests.

Shareholders are first and foremost investors in a limited company. They provide the funding by way of initial capital and may be invited at a later date to make further investments and or expand their share of the company.

Shareholders have the authority to appoint the directors of a limited company. They also have different rights and can exercise control over the company depending on the percentage shareholding that they wield. The rights of shareholders may be specified in the company’s Articles of Association.

They receive their rewards, if the company has a successful trading year, by way of dividend payments reflecting the amount and type of shares which they hold.

Many newly formed limited companies often have a single shareholder who also acts as a director.

In common with many other types of business, a limited company has a number of legal and financial obligations. A number of these take the form of recurring, often annual, administrative duties such as submitting and filing information with Companies House. In particular recording any changes in control of the company, changes in share capital, the company’s registered office and so on.

On the financial side the company must maintain accurate financial records at all time. It must ensure that it can meet all of its outstanding financial liabilities and trade solvently.

As well as paying Corporation Tax on its profits a limited company, which is also an employer will have the duty of operating PAYE on its employees’ wages and salaries and paying the tax and National Insurance Contributions over to HM Revenue & Customs.

An active trading company will also have common law responsibilities for its premises and employees.

Although a limited company may engage the services of an accountant to carry out many of these duties it is still responsible for ensuring that the work is carried out. Ultimately the company’s directors carry this responsibility.

Limited companies pay Corporation Tax (CT) on their profits unlike sole traders and partnerships which pay Income Tax on theirs.

Profits are usually calculated by deducting business expenditure from trading income with the resulting net profits being charged to tax at 19%.

Other tax deductions, for example on qualifying capital expenditure and research & development may also be available.

If a company has a taxable trading turnover above the VAT registration threshold of (currently) £85,000 pa, it will need to register and charge VAT on its sales. It will be able to deduct VAT it has been charged on goods and services it has purchased.

As an employer a limited company will need to pay employer’s National Insurance Contributions on wages and salaries it pays to its employees.

Once you’ve chosen what type of company you would like to form, and many will begin by opting for a private limited company, there are a few simple steps that need to be followed:

  • Pick your company name – you need to be careful here as there are a few rules and you need to check that your proposed company name has not already been taken.
  • You can use the Companies House online set up which will ask for further information.
  • Disclosing the type of business your company will be involved in. This is done by selecting an appropriate code which best covers your proposed activities from an online list. You can select a ‘model’ form of Articles of Association to get started – it can be amended later if needs be.
  • Decide what Registered Office address you want and also provide a service address.
  • Finally decide how your company is to be structured as regards the number, types and values of shares, which shareholders you want and what their initial shareholding will be.

With these decisions taken and the information reported to Companies House your company can be set up in a matter of a few hours. For more detailed information, please refer to our guide on how to set up a limited company.

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