Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Corporation
  2. Corporation tax
  3. Franchising
  4. Partnership
  5. Sole trader
  6. VAT

Limited Company – What is a limited company?

A limited company is a type of business structure which has been incorporated into a legally distinct body or ‘person’.

Are you a sole trader or entrepreneur? Is your business growing? Perhaps it's time to incorporate.

If you choose to run your business as a limited company, the business will:

  • Be legally distinct from the people who run it.
  • Have separate finances from the owner's personal finances.
  • Be able to own assets and keep any profits it makes after tax.

There are two kinds of limited company: private limited companies and public limited companies:

Private limited companies cannot offer shares to the general public. In the UK, this is a one of the most common set-ups for small businesses.

Public limited companies (PLCs) can raise capital by offering shares to the general public. Shares are traded on the stock exchange, and a PLC must have issued shares to a value of at least £50,000 before it can trade. This structure is more common for larger, more established businesses.

Limited companies and limited liability

Within some business structures – such as the sole trader set-up – there is no legal distinction between the owner's finances and the business's finances. As such, if a business fails, the owners are personally responsible for any debts.

Because a limited company has separate finances and is legally distinct from its owners, shareholders have ‘limited liability’ – meaning that owners and shareholders are not personally liable for any losses or debits incurred by their business.

Limited liability is one of the main advantages of the limited company set-up, as shareholders are only legally responsible to the extent of their original investment and can only lose the capital they initially put into the business.

Setting up a limited company

To set up a limited company, you will need to register with Companies House – this is called incorporation.

You can register your limited company online or via post. You can either do this yourself or pay an accountant or solicitor to go through the process on your behalf.

When registering, you will need to provide:

  • The full registered name and address of your company.
  • The names and addresses of directors and, if applicable, the company secretary.
  • Details of shareholders and capital.

Limited companies and tax

Once your limited company is incorporated, you will need to register for corporation tax. This needs to be done within three months, or you might have to pay a fine.

All limited companies must pay corportation tax, but you may also be elligble for other kinds of taxes such as VAT, Capital Gains Tax or PAYE and National Insurance Contributions.