What does it mean to be a limited company?
In the UK, a limited company is the second most popular business structure for active trading. According to the Federation of Small Businesses (FSB), there are approximately 2 million actively trading limited companies, compared to about 3.5 million active sole traders. Overall, more than 4 million limited companies are registered with Companies House.
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In total, there are over 4 million limited companies registered with Companies House.
What is a limited company?
Limited companies are incorporated businesses that can be limited by shares or guarantee. Here’s a breakdown of these terms:
- Incorporated business: This means the company has its own legal identity. As a separate legal entity, the business can enter into contracts and be held accountable for its liabilities independently of its owners.
- Limited: Companies limited by shares or guarantee restrict the financial liability of their members (shareholders or guarantors) to the amount they have invested or guaranteed. This means that, unlike sole traders and partnerships, the owners of limited companies are generally not personally liable for the organization’s debts.
Limited companies must be registered with Companies House, and their details will subsequently appear on the public register. They must adhere to various rules and regulations, most of which are outlined in the Companies Act 2006.
What are the types of limited companies?
The vast majority of limited companies are private companies limited by shares. These are non-public companies whose ownership is structured through shares, even if only a single share is owned by a sole director-shareholder. This type of company can retain profits after tax and distribute them to shareholders through dividend payments. Other types of limited companies include:
Private companies limited by guarantee: These companies are typically non-profit organizations. Instead of having shareholders, they are run by guarantors whose liability is limited to a predetermined amount. Any profits made are reinvested back into the company.
Public limited companies (PLCs): Similar to private companies limited by shares, PLCs must have a minimum allotted share capital of £50,000, with at least 25% fully paid up before commencing business. They can offer their shares for sale to the general public, such as on the stock market.
Limited Liability Partnerships (LLPs) are similar to limited companies but are generally regarded as distinct entities. Although LLPs are incorporated businesses with their own legal personality and limited liability, they do not issue shares. Their structure is more akin to that of traditional partnerships.
What are the advantages of limited companies?
In addition to the core benefits of having their own legal personality and protecting their members from personal liability for business debts, limited companies offer several other advantages:
- Tax efficiency: Profits can be reinvested in the business instead of being paid out as dividends and taxed.
- Raising capital: Selling shares can generate new capital for the company.
- Credibility: Limited companies often enjoy a more professional image compared to sole traders.
- Company name: Once registered with Companies House, a company name cannot be used by another business.
There is generally more administrative work involved in setting up and running a limited company compared to starting out as a sole trader. However, a next-generation company operating system like Startxpress can help set up and manage a limited company in the UK.
Do you have any other questions?
A limited company in the UK is a separate legal entity that offers limited liability to its owners, protecting personal assets from business debts. There are different types, including companies limited by shares or guarantee. This structure provides tax benefits, credibility, and easier access to capital, although it requires more administrative work than being a sole trader.
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