What is a limited company

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There are essentially three legal or accounting structures recognised for starting a business. You can go it alone by being a sole trader, team up to form a partnership or operate a limited company. Choosing the right one is important.

What is a limited company? There are two types of limited company – those that are publicly traded (known as a public limited company or plc) and those that are privately owned (identified by the abbreviation Ltd at the end of their name). We will focus on the latter. A limited or limited liability company is very different from a sole trader. If you're a sole trader or partner, you can be held personally liable for it – outstanding debts can be met from your personal assets.

A limited liability company, however, is a separate legal entity and can own property, incur debts, sue and be sued. Any business dealings are made on behalf of the company, rather than you. Its owners are liable only for the amount invested.

A limited liability company must have at least one director to manage the business and a company secretary to make sure all the rules are followed and official records maintained.

Registering and running a limited company requires more legal administration than a sole trader business or partnership. However, while the business owner is personally responsible for any debts incurred by a sole trader business, a limited company is a separate legal entity to the company directors. Profits and losses belong to the company, and the business can continue regardless of the death, resignation or bankruptcy of the shareholders or people who run the business.

Limited companies pay corporation tax on their profits and company directors are taxed as employees in the same way as any other people you employ to work for the company.

Your personal financial risk is restricted to how much you invested in the company and any guarantees you gave when raising finance for the business. However, if the company fails and you have not carried out your duties as a company director, you could be liable for debts as well as being disqualified from acting as a director in another company.

How do you set up a limited company?

If you are looking at setting up a limited company, there are three things you need; payment to the registration body Companies House, a company name and a UK address. This is the address of your registered office – somewhere to keep official documentation, to receive official correspondence and where court documents can be served.

There are several methods of setting up a company. The first is to deal directly with Companies House. It costs £15 (online) or £40 (paper). It is normally the cheapest option and there are staff give guidance on general matters such as filling in forms or company names.

However, registration can be time-consuming, especially if you make a mistake, and Companies House staff will not advise you about specific matters such as the content of the memorandum and articles. If you want enlist some help, a company formations service, solicitor or accountant can help you form a new company for a fee; costs will vary depending on the level of service that you want.

Finally, you can buy an ‘off the shelf' or readymade company. You simply transfer your name to an available one. The process can be completed on the same day but the choice of names may be limited.

Steps to registering a limited company are as follows:

  1. Decide whether you can register the business yourself or if you need outside help.
  2. Decide on the company officers.
  3. Choose a name for the company.
  4. File the correct documents with Companies House.
  5. Start trading!

Memorandum of Association

Part of the registration process involves stating the nature of your new company. This is done in a Memorandum and Articles of Association, sets of which can be bought from legal stationers. The Memorandum describes what your company is and does, by outlining the following:

  • Company name: There are some restrictions – you can't include sensitive words like international and federation. It must finish with the word limited but not have it elsewhere. Also, it must not be offensive or imply criminal activity and cannot have been registered by anyone else. You can check for individuality by searching the Company Names Index at Companies House and the Trade Marks Register at the Patent Office. Refer to the Business Names Act 1985 and the Company and Business Names Regulations 1981 for more information.
  • Location of the registered office: This is the UK country in which your company’s registered office is located.
  • Objects of the company: Here is where you describe what your company does. You must limit your business activities accordingly, so make it a wide statement, such as “general commercial trading company”.
  • Limiting the liability of the members: This means each owner of the company has to contribute no more than the value of their shares.
  • Share capital: You must state the amount of capital in the company and how it is divided.

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