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Accounting terms explained in a simple way

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Limited Companies – What are limited companies?

Definition: Limited companies exist in their own right, meaning that the company's finances are separate from the personal finances of their owners.

A private limited company, although having no limit to the number of share holders it can have, may only sell its shares privately and it is therefore restricted in the amount of capital it can raise. In contrast, the public limited company can invite the public to buy its shares and therefore has the greater potential to raise the most capital.

Shareholders of both private and public companies are part owners of their companies, Limited companies having the advantage of having restricted liability for the debts for the company.

Shareholders are not personally responsible for the company's debts, but directors may be asked to give personal guarantees of loans to the company.

Private or public limited companies

  • Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
  • Public limited companies (plcs) must have at least two shareholders and must have issued shares to the public to a value of at least £50,000 before it can trade.

Set-up of a Limited Company

  • Must be registered (incorporated) at Companies House.
  • Must have at least one director (two if it's a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be a person.
  • Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House.
  • Public limited companies must have a qualified company secretary.

Records and accounts

Accounts must be filed with Companies House before the time allowed for filing those accounts to avoid a late filing penalty, and accounts must be audited each year unless the company is exempt.

When you file your Annual Return for the first time a letter will be issued to the Registered Office containing the company's authentication code and instructions for use of Companies House web filing services. Please follow the instructions in the letter.

Directors are responsible for notifying Companies House of changes in the structure and management of the business.


Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

Corporation tax

If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax. Companies liable to corporation tax must make an annual return to HMRC.

Company directors are employees of the company and must pay both income tax and Class 1 National Insurance contributions on their salaries.