What is a Limited Company?

A limited company is usually a business that is legally set up in its own right separate from its shareholders and directors.

The limited company structure comes in two forms called limited by shares and limited by guarantee with both limiting the liability of it’s shareholders.

Setting up a limited company instead of being a sole trader can have its advantages like helping to reduce the amount of tax you pay.

Another benefit of a limited company is that a company owner is not liable for a companies debt because the company is a separate legal entity. This means that the personal assets of a company owner are not at risk if the company has financial problems.

Limited companies are set up and regulated by the government department called Companies House.

What are the types of Limited Company?

There are a few different types of limited company to choose from which we detail below:

Limited by shares

A company limited by shares is the most common type of limited company and means a company is owned by shareholders.

Each shareholder has a designated number of shares with each company needing to have at least one shareholder.

If you are the only shareholder in a company you will have 100% ownership of the company and the worth of each share can be of any value.

There are two main company options that are limited by shares:

  • Private limited company which is the choice for most small businesses with only one director needed and a low £1 entry point as share capital.
  • Public limited company or PLC which requires a minimum share capital of £50,000 and at least two directors, two shareholders and a qualified company secretary.

Limited by guarantee

The second type of limited company has guarantors instead of shareholders and they have a guaranteed amount of a company instead of shares.

Guarantors don’t normally take profit from the company with any profit being used for other purposes for example charitable donations.

A guarantor of a limited company makes a legal promise called a guarantee to personally pay the company any of the companies debt for the sum of their guaranteed amount.

What is a Limited Company Shareholder?

A shareholder in a limited company can be an individual person or a corporate body. A company shareholder does not have to be a director of the company to buy its shares.

Shareholders invest money into a limited company and in return receive a number of shares that entitles them to a part of the companies trading profits.

Owning shares in a limited company is different to owning shares in a public company. An example of a shareholder in a public limited company is an investor buying shares on the stock exchange.

What is a Limited Company Director?

A limited company director is an individual who is legally responsible for the managing of the company.

You do not have to be a shareholder to be a director of a company with a director being classed as a separate legal entity to the company.

There is no limit to the number of directors you can appoint with the following being the main criteria for individuals to be appointed as a director:

  • You must be 16 years or older.
  • You cannot be the company auditor.
  • You must not be un discharged bankrupt.

The responsibilities of a company director include:

  • Fulfilling all accounting requirements and making relevant submissions to HMRC.
  • Paying corporation tax where applicable.
  • Submitting applicable records to companies house.
  • Administering payroll and PAYE processes.

Can I pay less tax if I run my business as a Limited Company?

The use of a limited company to pay less tax is a common strategy for sole traders and start ups who become the only director and shareholder in their own company.

In some cases you may pay less tax and national insurance if you run your business as a limited company. Two of the main reasons for this are:

  • Income from the company can be paid as a salary under PAYE and as a dividend. The dividend element of your income is not liable for NIC and is therefore not taxed as heavily.
  • Corporation tax rates are typically lower than the income tax rates.

There are advantages and disadvantages to setting up a limited company so choosing to become a limited company needs to be thought through with professional advice from an accountant recommended before incorporation.

How do I set up a Limited Company?

Forming a limited company is also known as incorporation and is handled by companies house.

The incorporation process can be done online and you need to follow a series of steps including choosing an acceptable company name, appointing at least one company director and deciding who will be a shareholder of your company.

You can use our how to set up a limited company guide to discover more about the steps you need to take incorporate your business.

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