Depending on whose figures you believe there are anywhere between 1.3 and 2.5 million limited companies in the UK. This makes Limited Companies one of the most common ways to run a business. In fact there are several forms of limited companies. These include Public Limited Companies (PLCs) and Companies Limited by Guarantee. The most common type though, and what most people mean when they talk about Limited Companies, is a Private Company Limited by Shares (or a Ltd. Company).
For the rest of this article we will deal with standard Private Companies Limited by Shares (Ltd. Companies). They have a few key features
Limited by shares
A limited company is called a limited company because it offers limited liability. What this means is, when the company starts up the investors buy shares in it. If the company goes bust the shareholders are only liable for (only have to pay) the value of their shares. They do not have to pay all of the company’s debts.
Separate legal entity
When you set up a limited company you are setting up a ‘separate legal entity’. It is like giving birth to a new person. The Company has the ability to take on contracts and debts rather than this having to be done by the people involved. If anything goes wrong with these contracts or debts it is the company that gets in trouble not the people. It is the company which becomes legally liable, not the people who own or work for it (Unless the people have been deliberately and seriously naughty, in which case their limited liability gets waived)
Public Limited Companies are ones whose shares are traded on the stock exchange. Anyone who wants to can buy them, they are publically available. Private Limited Company Shares, by contrast, are not available for public sale. As the name suggest they can only be sold privately.
Shareholders and Directors
Limited companies are owned by their shareholders (sometimes known as members). They are run by their directors. At least that is the simple version. It is possible to have a limited company where one person is the sole director and sole shareholder. Similarly in larger companies the directors may appoint managers to do the actual running of the company. However it is the directors who have the legal responsibilities.
In order to be a limited company you have to file a set of independently audited accounts with Companies House. These are available, along with the names and addresses of the directors, for anyone to view whenever they like. So if someone is going to do business with you they can check out your financial status. It lets people know if your company is in trouble and who owns and runs it.
The rules of a limited company are its Articles of Association. These can, within reason, be written any way you like. They determine things like who gets a say in company decisions, who can buy and sell shares and what the company does with its profits.
Is a limited company right for me?
Limited companies do come with a certain amount of paperwork and expense attached, filing annual audited accounts being the main one. However the protection they offer individuals from debts and legal action can be worth it. Directors of limited companies can also pay a lot less tax than people using business structures such as sole traders and partnerships. Ultimately it will be a case of seeing whether these benefits are worth the effort for you.
If you do want to start up a limited company then you can take advantage of our free company formation service by opening a bank account with our high street banking partners.