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What is a limited company?

A private limited company is a business structure in which the liability of its members, shareholders and directors is limited, hence the term ‘limited liability company’.

What is a limited company
There are over 1.3 million limited companies registered with Companies House (the regulatory body for all limited companies), and the operation of all companies is governed by company law (most notably the Companies Act 2006), as well as any restrictions applied to individual companies.

Types of limited company

There are three main types of limited company in the UK:

1. Limited by shares (by far the most common type).

2. Limited by guarantee (used by charities and other organisations).

3. Public limited companies (used by traded, larger companies).

Benefits of limited companies

Compared to the sole trader or partnership route, the limited company offers numerous benefits, such as:

1. Working via a limited company is usually the most tax efficient way to operate, as dividends are not taxed as heavily as salaried income as they are not subject to National Insurance Contributions.

2. Your personal finances and those of the company are kept distinct, so your personal liability is limited should something go wrong with your company.

3. A limited company may be required in certain industries, and can provide a reassuring and professional image to potential clients and customers.

Responsibilities of limited company directors

As a limited company director, you will be tasked with a number of responsibilities, which sole traders do not have to concern themselves with.

You must produce annual company accounts, submit an Annual Return (AR01) each year, and keep Companies House informed of any changes to the company (such as director, or address changes).

You will need to appoint an accountant to deal with your tax affairs, although it is ultimately your responsibility to ensure that any legally required documentation is submitted on time, and all tax liabilities are paid to HMRC on time.

How are limited companies taxed?

All limited companies must pay Corporation Tax on their annual profits.

If your company turnover is expected to exceed the current threshold (£81,000 in 2013/14), you must register for Value Added Tax (VAT).

Limited company directors typically receive a small salary, and shareholders draw down company profits in the form of dividends.

Income Tax and National Insurance Contributions (NICs) will be deducted from directors’ salaries via your own payroll system at source (assuming any liabilities are owing), and your will pay tax on the remainder of your earnings via the annual self assessment process.

How to choose a company name

Of course, one of the first things you need to do is to choose a suitable company name. Unsurprisingly, there are a number of rules governing company naming – certain sensitive expressions and words are barred, your proposed name cannot be too similar to an existing one, and you must be careful not to infringe the trademarks of existing businesses.

You should refer to Companies House guidance GP1 for more information on ‘Incorporation and Names’.

What information do you need in order to set up a company?

In order to set up a company, alongside the proposed company name, you will need to provide 3 pieces of information to Companies House to complete the process:

1. Form IN01 contains all the basic information about your new company, including the names and addresses of all directors, details of the share capital, the type of business you are going to undertake, and the registered office address.

2. Memorandum of Association – this contains the name and address of the initial subscribers to the new limited company (shareholders), and shows the intention of each party mentioned to subscribe to at least one share.

3. Articles of Association – these describe how the company is to be run. Since the Companies Act 2006 became law, new ‘model articles’ can now be used when you set up a company, unless for some reason you wish to provide your own Articles.

How do you form a limited company?

There are three common ways to incorporate a new company, although in each case, exactly the same information is submitted to Companies House.

1) Our in-house incorporation service costs £75 + VAT, and includes full support, which you may not get elsewhere.

2) You can set up a company direct via the web at Companies House.

3) An accountant can set the company up for you, and if you are going to use their services on an ongoing basis, they can also set you up for a number of other things, such as VAT and Corporation Tax at the same time. You can visit our growing list of accountants here.

Further Information

Company Bug’s main focus is on private limited companies, as described above.

For the sake of completeness, there are also several other types of company: Community Interest Companies (CICs), Unlimited Companies, Right To Manage Companies and Property Management Companies.

Another structure, often used by accountants and lawyers, is the Limited Liability Partnership (LLP), which is often described as a combination of the standard limited company and a self-employed partnership.

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