1. What Is a Limited Company?
A limited company is a type of business structure where the company is considered a separate legal entity from its owners. This means the company itself can own assets, enter contracts, and be liable for its debts — not the individual shareholders, whose financial responsibility is limited to their investment in the business.
2. Key Feature of “Limited”
The term “limited” refers to limited liability. If the company faces financial trouble or legal claims, the owners (shareholders) only risk losing the money they have invested in the company, not their personal assets.
3. Types of Limited Companies
- Private Limited Company (Ltd): Shares are privately owned and not traded on the stock exchange. Most small and medium-sized UK businesses use this structure.
- Public Limited Company (PLC): Shares can be sold to the public via the stock exchange. Suitable for larger businesses seeking significant investment.
- Limited by Guarantee: Often used by non-profit organisations; members’ liability is limited to a set amount they agree to contribute if the company is wound up.
4. Advantages of a Limited Company
- Limited liability protection for owners.
- Separate legal identity from its shareholders.
- Easier to raise capital through share sales.
- Can offer a more professional image to clients and investors.
- Potential tax benefits compared to sole traders.
5. Disadvantages of a Limited Company
- More complex and costly to set up than sole proprietorships.
- Must comply with stricter legal and reporting requirements.
- Public disclosure of financial records at Companies House.
6. How a Limited Company Differs from a Sole Trader
- Liability: Sole traders have unlimited liability; limited company owners are protected.
- Taxation: Sole traders pay income tax on profits; limited companies pay corporation tax, and owners pay tax on personal income from the business.
- Ownership and Continuity: A limited company continues to exist even if ownership changes or an owner dies.
7. Setting Up a Limited Company in the UK
The process generally involves:
- Choosing a unique company name.
- Registering with Companies House.
- Appointing directors and (if applicable) shareholders.
- Creating articles of association.
- Paying the registration fee.
8. Ongoing Responsibilities
- Filing annual accounts and confirmation statements.
- Keeping accurate company records.
- Complying with UK company law.
Frequently Asked Questions
Q1: What does Ltd stand for in a company name?
It stands for “Limited” and refers to the limited liability of shareholders.
Q2: Can one person own a limited company?
Yes, a single person can be the sole director and shareholder.
Q3: Is a limited company better than being self-employed?
It depends on your circumstances; limited companies offer liability protection but have more administrative requirements.
Q4: Can a limited company operate internationally?
Yes, but it must comply with laws in the countries where it operates.
Q5: Do I need a business bank account for a limited company?
Yes, as it is a separate legal entity, it must have its own bank account.
Q6: Can I convert my sole trader business into a limited company?
Yes, many business owners choose to incorporate for tax and liability reasons.
Conclusion
The meaning of a limited company centres around its separate legal identity and limited liability protection for owners. Whether structured as private, public, or limited by guarantee, this model offers benefits for those seeking growth, credibility, and protection from personal financial risk. However, it also comes with greater legal obligations and administrative duties.