What is a limited company?

If you’re running your own business, or thinking about becoming your own boss, a limited company could be a great option for you. But you might be wondering – what is a limited company and how do they work?

In simple terms, a limited company is a type of business structure, and one which is legally separate from its owners.

The word ‘limited’ signifies that a business’s owners are under ‘limited liability’, which means that they are protected from personal liability for the company, legally and financially. For example, if the company goes bankrupt, their own personal money and assets are safe.

In this article, we outline what a limited company is, how limited companies work, and the different types of limited companies that you can set up.

Top Tip: If you’re not sure on the right business structure, then we have compiled a guide on whether a sole trader or a limited company is better, as well as the pros and cons of each.

How does a limited company work?

A limited company is a form of business structure that has been incorporated at Companies House, and essentially operates as an individual entity.

Compared to a sole trader, which is tied to one specific person, a limited company is an entity in itself, meaning that its owners are separate, and any business dealings are made via the business, not the individuals.

What is limited liability?

As previously mentioned, owners and shareholders of limited companies are protected by ‘limited liability’, which means that if something goes wrong, or bankruptcy is on the cards, the owners are not responsible for the entire business, only their shares in the business. This is because the business is operating as a separate legal entity.

The benefit of this is that business owners can benefit from company profits without personal liability. They can direct the business without the risk of losing their own personal assets. With multiple employees in a business, being a limited company protects owners from any actions within the business, which can sometimes be out of their control.

The drawbacks of a limited company are the increased administrative and legal requirements. Limited liability companies require filing tax returns, annual account reporting, and reporting on any significant changes within the business. All of this information is on public record too.

Top Tip: When forming a limited company, you will also need to file an annual confirmation statement. This is essentially an update that you provide to Companies House to ensure that your information is correct ✅

How shares work in a limited company

Setting up a limited company also means that your company will now have shares.

Shares are essentially a portion of ownership of a company. If a company has 1,000 shares, and someone owns 100 shares, they own 10% of the company.

Shares also serve several other purposes:

• Shares will give owners a percentage of dividends
• Shares will give owners voting rights
• Shares give owners the ownership of capital if the business is sold

The price of each share will also determine the amount that the shareholder may have to pay for debts. The price of the shares will determine the limit of debts that ever need to be paid.

So for example, if shareholder A has 100 shares at £10 a share, £1,000 could be set as the limit for any debts required to be paid.

Different types of limited company

There are different types of limited companies, which are all suited to different company types. When you register a limited company, you have the option to adapt your limited company to suit your business needs. 

Here are all the main types of limited companies that you can set up:

Private company limited by shares (LTD)

A private company limited by shares is the most common type of limited company. 

In this type of structure, a company is formed as a separate legal entity and shares can be purchased by specific individuals.

Any profits from the company can be reinvested into the company, or paid to the shareholders via dividends.

Private company limited by guarantee (LTD)

A company that is limited by guarantee is the same as a regular limited company in that it forms a distinct legal entity from its owners.

However, the difference is that a private company limited by guarantee has no shares or shareholders, and therefore no share capital. This is a common structure for non-profit organisations such as charities.

Public Limited Company (PLC)

A limited company going public and becoming a public limited company (PLC), means that anyone, including members of the public can become shareholders. 

Setting up a PLC requires your business to be a lot more established.

Public limited companies must have:

• At least two shareholders
• Have issued shares worth at least £50,000
• Have at least two directors
• Have a qualified company secretary

PLCs are generally formed by companies that are well established and have been operating as private limited companies.

Companies that become PLCs can raise money far more effectively by issuing public shares, and can therefore also generate more interest for the business. The increased profile can also help them attract the top talent when it’s time to hire for new positions.

However, many companies stay private forever and have no need to go public. Huawei and Aldi have remained private limited companies despite their success.

Private Unlimited Company

Private unlimited companies are unusual; they are types of companies with share capital but with no limited liability. This means that the shareholders have full liability for the company – if the company fails, they are fully responsible for the losses, in the same way as a sole trader.

The advantage of a private unlimited company is that it can keep its financial affairs private. A limited company is required to have its accounts on public record, but a private unlimited company doesn’t have to file its accounts unless it operates in certain industries such as banking, or is the parent company or subsidiary or a limited company. This way, the business can trade without revealing its financial status to competitors and the public.

Limited liability partnership (LLP)

A limited liability partnership is a business partnership that has the benefit of limited liability.

In a traditional business partnership, both partners have unlimited financial responsibility. But, by becoming a limited liability partnership, the partnership can be withheld with limited liability – both partners are now protected.

In a limited liability partnership, partners will pay a fixed sum of money towards the business debts if the business fails, but they are not personally liable for the debts or failure of the business.

A limited liability partnership must have a minimum of two members, but there is technically no limit on the number of partners that can be added.

Community Interest Company (CIC)

A community interest company is a type of limited company designed for businesses that operate specifically for a community benefit and not for private advantage. CICs can be limited by shares or by guarantee.

CICs have unique features which make them attractive to social enterprises and non-profit organisations. For example, CICs have an ‘asset lock’, which ensures that the company’s assets and profits are put towards the community and not misappropriated. CICs also have to file an annual community interest company report, which ensures that they remain transparent and true to the interests of their community.

What is a private limited company?

In the list above, all are private limited companies, except the companies which decide to go public.

A private limited company is any type of business entity in private ownership, which means that only members of the company have access to the shares and/or the profits of the business, but the public do not.

Public limited companies operate in the same way, however, a portion of the shares of the company are opened up to the public, and normally listed on a stock exchange.

How to set up a limited company

Setting up a limited company is very simple, and there are currently more than five million registered companies in the UK. 

To set up your company, you need to incorporate it with Companies House, which you can either do directly or via a formation agent such as Tide who can take care of the process for you and offer additional benefits.

You will need to provide information about your company, including:

• Company name
• Registered office address
• Information about directors and shareholders

With Tide, you can complete your company registration within minutes, your company will usually be set up within hours, and we’ll even open a free business bank account for you at the same time so you can get started with your business straight away.

Top Tip: If you’re registering your own limited company, read more about the role and responsibilities of a company director in our guide.

Wrapping up

Forming a limited company is a good option for many businesses, and protects you with limited liability, so you can rest assured that if anything goes wrong, you are not personally liable.

Limited companies can be more complicated to run than a sole proprietorship, so it’s important to know what you need to do. There are multiple types of limited companies, so use this article to determine which limited company structure might be best suited for your business. 

Tide has everything you need to get started with your new company and help you grow, from start up loans to get you off the ground to a business savings account to boost your business balance, and even accounting software to keep your finances in order.

Top Tip: Want to learn more about starting your own business? Check out our guide to starting a business💡