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.