What are Limited Companies? All You Need to Know in 2023

Limited companies are a popular business structure due to their many benefits, such as limited liability, separate legal entity status, and the ability to raise capital through the issuance of shares.

In this article, we will explore what limited companies are, their types, advantages, and disadvantages.

We will also guide you through setting up a limited company.

Let’s get started!

What is a Limited Company?
Types of Limited Companies
Advantages of Limited Companies
Disadvantages of Limited Companies
How to Set Up a Limited Company
FAQs
Conclusion
References
Recommendations

What is a Limited Company?

A limited company is a business structure that treats the company as a separate legal entity from its owners.

This means the company can own property, enter into contracts, sue and be sued, and have assets and liabilities.

The owners of a limited company are not personally responsible for its debts, as their liability is limited to the amount they have invested in the company.

Limited companies are commonly used by small businesses, startups, and entrepreneurs who want to protect their assets from the risks and liabilities of running a business.

This is because the company’s debts are not the owners’ responsibility, and they cannot be held personally liable for any legal claims or disputes.

Limited companies also have more legal requirements and regulations to follow than other business structures, such as sole proprietorships or partnerships.

Types of Limited Companies

There are two types of limited companies:

1. Private limited companies

2. Public limited companies

Private limited companies are the most common type of limited company, while public limited companies are less common and tend to be larger and more complex.

Private limited companies are owned by small individuals or entities, such as family members, friends, or business partners. The ownership is usually restricted to a maximum of 50 shareholders, and the company’s shares cannot be traded on a public stock exchange. This means that private limited companies have more control over their ownership and management structure, as the shares are not easily transferable to the public.

On the other hand, public limited companies can sell their shares to the public and are often listed on a stock exchange. This means they have more access to capital and can raise funds by issuing shares to the public. However, this also means they must comply with more legal requirements and regulations, such as publicizing their financial statements and performance data.

Public limited companies are often larger and more complex than private limited companies, with more shareholders, directors, and employees. They are also subject to greater scrutiny from regulators, investors, and the public.

In terms of ownership and management, limited companies can be owned and managed by the same individuals or separate individuals. For example, the company’s owners may also be the directors who make decisions on behalf of the company. Alternatively, the owners may appoint separate directors to manage the company’s affairs, which can help to separate personal and business interests.

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Advantages of Limited Companies

Limited companies have several advantages that make them an attractive option for businesses.

Some of these advantages include the following:

#1. Limited Liability Protection

One of the main advantages of a limited company is that it offers limited liability protection to its owners.

This means the owners’ assets are not at risk if the company becomes insolvent or faces legal action.

The owners’ liability is limited to the amount of capital they have invested in the company.

#2. Separate Legal Entity

A limited company is a separate legal entity from its owners.

This means the company can enter into contracts, sue, or be sued in its name.

It also means that the company’s ownership and management can be separated, which can be helpful in cases where the owners want to avoid being involved in the business’s day-to-day operations.

#3. Perpetual Existence

Unlike sole traders and partnerships, limited companies have perpetual existence.

This means the company can continue to exist even if the owners die or sell their shares.

They can also transfer the company to new owners without affecting its legal status.

#4. Tax Benefits

Limited companies often benefit from lower tax rates than sole traders or partnerships.

They may also claim tax deductions on expenses related to running the business, such as salaries, rent, and equipment.

#5. Improved Credibility

Limited companies are often viewed as more credible and trustworthy than sole traders or partnerships. They are subject to more legal and regulatory requirements, such as filing annual accounts with Companies House and appointing a company secretary.

Overall, limited companies offer several advantages, including limited liability protection, separate legal entity status, perpetual existence, tax benefits, and improved credibility.

These advantages can make limited companies attractive for businesses looking to protect their owners’ personal assets, benefit from tax advantages, and improve their reputation in the eyes of customers, suppliers, and investors.

Disadvantages of Limited Companies

While limited companies offer several advantages, you should consider some disadvantages before deciding whether to set up a limited company.

Some of these disadvantages include the following:

#1. Increased Administrative Burden

Limited companies are subject to more legal and regulatory requirements than sole traders or partnerships.

This can result in a higher administrative burden and additional costs, such as filing annual accounts with Companies House and appointing a company secretary.

#2. Increased Costs

Limited companies often require more capital than sole traders or partnerships to set up and maintain.

They may also face higher costs for professional services, such as accountancy and legal advice.

#3. Lack of Privacy

Limited companies must make certain information public, such as details of their directors and shareholders, which can result in a loss of privacy.

#4. Limited Control

Limited companies are subject to more legal and regulatory requirements, which can limit owners’ control over the business.

For example, shareholders may have limited voting rights or must follow certain decision-making procedures.

#5. Taxation

While limited companies can benefit from lower tax rates, they may also face additional taxation, such as corporation tax on profits and taxes on dividends paid to shareholders.

While limited companies offer several advantages, such as limited liability protection and improved credibility, they also come with disadvantages, such as increased administrative burden, costs, lack of privacy, limited control, and taxation.

It is important to consider these factors carefully before deciding whether to set up a limited company.

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How to Set Up a Limited Company

Setting up a limited company can seem daunting, but it’s a relatively straightforward process.

Here are the steps you need to follow:

#1. Choose a Company Name

Choosing a company name is an important first step when setting up a limited company.

Your company name will be your brand, and choosing a name that reflects your business and resonates with your target audience is important.

Here are some key things to consider when choosing a company name:

Unique and Available: Your company name must be unique and not already in use by another company. Using Companies House’s online name availability checker, you can check whether a name is available. You should also check that the name is not already trademarked.
Descriptive: Your company name should describe your business and what it does. This will help customers and clients understand what your business is about.
Memorable: Your company name should be easy to remember, spell, and pronounce. This will make it easier for people to find your business and refer it to others.
Professional: Your company name should be professional and appropriate for your business. Avoid too quirky or unprofessional names, as this may deter potential customers and clients.
Brandable: Your company name should be brandable and can be used across different marketing channels and platforms. This includes your website, social media accounts, business cards, and other marketing materials.
Future-proof: Your company name should be future-proof, meaning it can grow and evolve with your business. Avoid names that may limit your business’s growth or scope.

#2. Register your company

Once you have chosen a suitable name for your limited company, the next step is to register it with Companies House.

This process can be done online or by post and involves submitting the necessary information and documents to register your company officially.

Here are some key steps involved in registering your company:

1. Choose a company formation service: Many company formation services are available online that can help you register your company with Companies House. These services will typically offer a range of packages that include different support and services, such as registering for VAT, setting up a business bank account, and providing a registered office address.

2. Provide company information: To register your company, you must provide the company name, registered office address, directors’ details, and share capital. You will also need to appoint at least one director and a company secretary (unless you register as a sole director company).

3. Complete the registration form: Once you have gathered all the necessary information, complete the company registration form. You can do this online via the Companies House website or by post using the appropriate form. The registration form will include details such as the company name, registered office address, details of directors and shareholders, and share capital.

4. Pay the registration fee: A fee is payable to register your company with Companies House, which can be paid online or by post. The fee is usually around £12 for online registration and £40 for postal registration.

#3. Set Up a Registered Office

Setting up a registered office is crucial when setting up a limited company.

The registered office is the company’s official address, where you will send all official communications and legal documents.

Here are some important things to keep in mind when setting up a registered office:

1. The registered office must be a physical address: It cannot be a PO Box or a virtual office. It must be a physical location where people can contact the company.

2. The registered office must be in the same country as the company’s registration: If your limited company is registered in the UK, the registered office must also be in the UK.

3. The registered office must be accessible to the public: Anyone who wants to visit the registered office must be able to do so during regular business hours.

4. Include the registered office on all company correspondence: Letters, invoices, and business cards.

5. You can use a service provider for your registered office: If you don’t have a physical address or don’t want to use your address, you can use a service provider to provide a registered office address for your company.

6. You must inform Companies House of any changes to your registered office: If you move your registered office to a new location, you must notify Companies House within 14 days of the change.

#4. Appoint Directors and a Company Secretary

When setting up a limited company, it’s important to appoint directors and, in some cases, a company secretary. Here are some things to keep in mind:

1. Directors are responsible for running the company: They make strategic decisions, manage its finances, and ensure that it complies with legal and regulatory requirements.

2. A company secretary can provide administrative support: The role of the company secretary varies depending on the company’s size, but they may be responsible for maintaining statutory registers, managing company meetings, and ensuring compliance with legal and regulatory requirements.

3. A company must have at least one director: This can be an individual or a corporate entity.

4. A company secretary is only sometimes required: A private limited company with only one director is not required to have a company secretary.

5. You must appoint directors and the company secretary in writing: This can be done through a board resolution or by completing the relevant forms and filing them with Companies House.

6. Directors and the company secretary must meet certain eligibility requirements: For example, they must not be disqualified from acting as a director or have any unspent criminal convictions.

7. Directors and the company secretary must be aware of their duties and responsibilities: This includes ensuring that the company is complying with legal and regulatory requirements, acting in the company’s best interests, and avoiding conflicts of interest.

#5. Issue Shares

Once you have appointed your directors and secretary, the next step is to issue shares. Shares represent ownership in the company and give shareholders certain rights, such as voting on company decisions and receiving a portion of the company’s profits.

To issue shares, you must determine the total number of shares your company will have and their nominal value, the amount assigned to each share. You can issue shares at par value, the same as the nominal value, or at a premium above the nominal value.

You will also need to decide who will be eligible to own shares in the company. This can include members of the public or be restricted to a specific group of people, such as employees or family members.

Once you have determined these details, you will need to create a share register listing the names and details of all shareholders, the number and type of shares they own, and any transfer of ownership.

#6. Register for Taxes

Registering for taxes is an important step in setting up a limited company. It involves identifying your company’s taxes and registering with the appropriate tax authorities.

Some taxes you may need to register for include corporation tax, value-added tax (VAT), and employer’s national insurance contributions (NICs).

To register for corporation tax, you must contact HM Revenue and Customs (HMRC) and provide details of your company, including its name, address, and registered office.

You will also need to provide details of your company’s directors and shareholders, as well as information about its accounting period and the date of its incorporation.

If your company is required to register for VAT, you must apply to HMRC for a VAT registration number. This number will allow you to charge and collect VAT on the government’s behalf and reclaim any VAT you have paid on business expenses.

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#7. Set up a Business Bank Account

Once your limited company is set up, having a separate business bank account is crucial. This will help keep your business finances separate from your finances. It also makes accounting and tax reporting easier.

To set up a business bank account, you must provide some documentation, such as your company registration number, proof of identity, and proof of address. You should shop around to find the best bank account, considering fees, interest rates, and additional services provided.

Once you have selected a bank account, you can start the application process. The bank will run credit checks and may require a deposit. It’s important to keep your business finances organized and maintain accurate transaction records.

FAQs

Do I need a company secretary for my limited company?

No, it is no longer a legal requirement to have a company secretary for most limited companies, but some companies may still choose to appoint one for administrative support.

How many shareholders do I need to set up a limited company?

You only need one shareholder to set up a limited company, but you can have multiple shareholders.

Can I change the name of my limited company?

Yes, you can change the name of your limited company by following the appropriate legal procedures and updating your company’s records.

Conclusion

Limited companies are a popular business structure due to limited liability and separate legal entity advantages.

However, they also come with higher administrative costs and legal requirements.

It’s important to consider these factors before starting a limited company and to seek professional advice if needed.

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