What Is a Limited Company?

Many startups choose to operate as a limited company for a number of reasons. Here, we’ll explain what exactly a limited company is and outline its advantages and disadvantages. 

One of the biggest decisions you’ll make prior to registering your company is deciding which type of business you want to register — you might be a sole trader, a partnership or a limited company. 

What Is the Definition of a Limited Company?

Unlike working in a partnership or as a sole trader, a limited company is a legal entity in its own right with a completely different structure, coupled with an array of tax and legal obligations. 
A limited company is essentially one that is incorporated (formally set up and registered with Companies House — the registrar or limited businesses in the UK), and issues shares to its shareholders. GOV.UK defines a limited company as, “a company ‘limited by shares’ or ‘limited by guarantee’”.

  • Limited by shares: These businesses usually make a profit. This means the company:  
    • Has shares and shareholders
    • Is legally distinct from those who run it
    • Has separate finances to your personal ones
    • Can retain the profits it makes after paying tax
  • Limited by guarantee: These businesses are usually “not for profit”. This means the company:
    • Has guarantors and a “guaranteed amount” 
    • Is legally distinct from those who run it
    • Has separate finances to your personal ones
    • Has profits invested back into it

Limited companies are usually managed by directors (also known as “company officers”) who may also be the company’s shareholders. A limited company must have at least one director and may be run by one or more owners (directors).

There Are Two Types of Limited Companies

Limited companies can be either “public” or “private”. A key difference between the two is that a private limited company does not publicly trade shares and is limited to a maximum of 50 shareholders. 

What Is a Private Limited Company?

Most UK companies are private limited companies (LTD). They’re legally distinct entities with their own assets, liabilities and profits. Shares cannot be offered to the general public and shareholders’ personal finances are covered by limited liability (liabilities are limited to the value of their shares). 

Private companies must file specific legal documents, including Articles of Association and a Memorandum of Association — both of which form the company’s constitution. 
A secretary is optional in a limited company, but the company must submit an annual return to Companies House every year. However, an annual general meeting (AGM) — a yearly meeting between shareholders to discuss progress — is not a requirement for private companies.

What is a Public Limited Company?

Like private limited companies, a public limited company (PLC) has its own assets, liabilities and profits. However, public company shares can be sold and traded to the general public and, subsequently, are listed on the stock exchange — only PLCs can raise capital from such public investment. 
Similarly, public companies must also possess Articles of Association and a Memorandum of Association. However, a minimum £50,000 allotted share capital must be proved in a Certificate for Commencement of Trading, obtained from Companies House, and 25% of this must be paid upfront. 
For PLCs, at least two company directors and a qualified company secretary are prerequisites. Additionally, a public company must hold an AGM. 

How to Shift from a Private to Public Company

Most companies start out as private limited companies. However, a director can shift to becoming a public company by re-registering the business in line with Part 7 of the Companies Act 2006. They can do this by:

  • Passing a special resolution
  • Sending “Form RR01” to Companies House

Pros and Cons of Private and Public

The major advantage of becoming a PLC is that you’re able to raise capital by selling shares to the general public. However, this means that you must be consistently compliant, as there are more rules and regulations to abide by compared to a private limited company. Generally, a PLC may only be a viable option for relatively mature companies that have a stable and established infrastructure with a view to expanding.

Advantages of a Limited Company

There are a number of favourable things to consider when registering a limited company:

  • Professional status: A limited company can be perceived as a more professional organisation compared to a sole trader, thus increasing your credibility and, potentially, customer base. 
  • Tax implications: In a private limited company, directors and owners can pay themselves through a PAYE salary, which can then be topped up with shareholder dividends after paying corporation tax. As such, private limited companies can benefit from tax savings not available to sole traders.
  • Name protection: When you incorporate your company, other companies cannot use your brand name, or a similar one, when trading. 
  • Raise capital: Unlike a sole trader, you can raise additional capital by selling shares, and the good news for investors is that they’re protected from any company failures, as their risk is limited to the value of their shares.
  • Excellent for deals: Generally speaking, larger companies will not work with businesses that are not incorporated, such as sole traders. Running a limited company allows you to reach a wider customer or client base and secure big-money contracts. 
  • Pension benefits: Whereas sole traders can only have a personal pension, employee pensions — which you are entitled to as an “employee” of your limited company — are slightly more generous.  

Disadvantages of a Limited Company 

Conversely, there are a number of things to look out for when you become a limited company:

  • Legal requirements: The administrative burden of owning a limited company is significant. There are a number of tasks you must complete each month or year, including filing tax returns and setting up payroll — missing any of the crucial submission deadlines or filing these incorrectly — no matter how accidental — could result in fines. 
  • Payment problems: Sole traders can simply take money out of the business when required without any real restriction. However, this is slightly more complicated for owners of limited companies. A director has to legally pay themselves in the form of a salary or dividend payment, and a monthly payroll salary must be adhered to in order to gain a salary.
  • Closure complications: Although it’s fairly straightforward to set up a limited company, it can be rather cumbersome if you need to cease operation because you’ll have to apply to dissolve the business. This can take up to three months. 

Ultimately, new business owners have to make the decision as to which type of business they want to register. If you want to run a credible company that’s capable of supporting you as you scale — and you’re prepared for the excessive legal and administrative requirements — setting up a limited company might be right for you.

Gain invaluable expert advice from Mint Formations to find out more about registering and setting up a limited company.

Want to register your UK limited company today?


Raj co-founded Mint Formations with business partner Andy Tree in 2017. Mint formations is established to nurture small UK businesses and enable exciting new opportunities for quick growth. As a successful entrepreneur, Raj knows how to start and run a business. He currently resides as a board member of seven successful companies across the world. He is best known for founding Integra Global Solutions, specialists in robotics, automation, and business process optimisation.

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