What Is a Limited Company? We Look at 11 Key Characteristics That Define Them!
A limited company is a business that is separate from its owners. This makes it easier for a business to secure business loans and investments. It must keep statutory books and filings that shareholders (and others) can inspect. It also offers tax-planning opportunities, such as using dividends to minimise income tax. It must comply with stricter compliance requirements than sole traders or partnerships.
What is a Limited Company?
A limited company, often called a “limited liability company” or simply “Ltd,” is a type of business structure commonly used by entrepreneurs and businesses in the United Kingdom and other countries. The defining characteristic of a limited company is that it offers limited liability protection to its owners, known as shareholders or members.
In the UK, limited companies are identified by the suffix “Ltd” for private limited companies and “PLC” for public limited companies. Setting up and managing a limited company involves legal formalities, including registration with the relevant government authorities, appointing directors, issuing shares, and complying with ongoing reporting and tax obligations. Limited companies are a popular choice for businesses of various sizes due to their liability protection and potential for raising capital.
|How to Register a Limited Company
|1. Choose a Company Name:
Select a unique company name that complies with naming regulations. The name should not be identical or too similar to existing registered companies, and it must end with “Limited” or its abbreviation “Ltd.”
|2. Appoint Directors and a Company Secretary:
Appoint at least one director who will be responsible for managing the company’s affairs. You can also appoint a company secretary, although this is not mandatory for private limited companies.
|3. Register the Company Address:
Provide the registered office address for the company. This is the official address for receiving legal documents and correspondence.
|4. Choose Shareholders and Issue Shares:
Determine the shareholders (members) of the company and allocate shares to them. Shareholders are the owners of the company. You must issue at least one share, but you can issue more as needed.
|5. Create Memorandum and Articles of Association:
Prepare the memorandum of association and articles of association. These documents outline the company’s constitution and internal rules. You can use standard templates or seek legal advice for customized articles.
|6. Register with Companies House:
Complete the company registration process with Companies House, which is the government agency responsible for company registrations. You can register your company online or by post. Be prepared to provide information about the company’s directors, shareholders, and registered office address.
|7. Pay the Registration Fee:
Pay the registration fee, which varies depending on the method of registration. Payment can be made online or by including a cheque with postal applications.
|8. Wait for Confirmation:
Companies House will review your application, and upon successful registration, they will issue a certificate of incorporation. This certificate confirms the legal existence of your limited company.
|9. Register for Corporation Tax:
After registration, you must register your company for Corporation Tax with Her Majesty’s Revenue and Customs (HMRC). You can do this online.
|10. Set Up Business Bank Accounts:
Open a business bank account for the company to handle financial transactions separately from personal accounts.
|11. Comply with Ongoing Requirements:
Ensure that you comply with ongoing legal and regulatory requirements, including filing annual financial statements and other reports with Companies House, maintaining accurate financial records, and fulfilling tax obligations.
|12. Consider Other Obligations:
Depending on the nature of your business, you may have additional obligations, such as VAT registration if your annual turnover exceeds the VAT threshold.
Features of a Limited Company
Here are the key features of a limited company:
- Limited companies provide a crucial advantage of limited liability to their shareholders or members. This means that the personal assets of the company’s owners are generally protected in the event of business debts or legal liabilities. Shareholders are typically only liable for the amount invested in the company, reducing personal financial risk.
- A limited company is considered a separate legal entity from its owners. It can enter into contracts, own assets, and incur debts. This separation of legal identity distinguishes the company from its shareholders.
- Limited companies have shareholders (also called members) who own shares in the company. Directors manage the company’s day-to-day operations and make strategic decisions. Shareholders and directors can be the same individuals or entities.
- Shares in a limited company can be bought, sold, or transferred among shareholders, allowing for changes in ownership and investment.
- Limited companies can raise capital by issuing shares to investors or shareholders. This makes it easier to attract investment for business growth.
- Limited companies must maintain accurate financial records and prepare annual financial statements. These records are typically audited and submitted to relevant government authorities for compliance.
- Limited companies are subject to corporate income tax on their profits. The tax rates and rules vary by jurisdiction. Shareholders may also be subject to taxation on any dividends received.
- A limited company’s name is typically protected, meaning no other business in the same jurisdiction can use the same or similar name.
- Limited companies have perpetual existence, meaning that their existence is not dependent on the status of individual shareholders or directors. They can continue to operate even if ownership changes.
- Limited companies are subject to regulatory requirements and legal obligations in the jurisdiction in which they are registered. Compliance with company law, reporting requirements, and tax obligations is essential.
- Limited companies can be public or private. Public limited companies (PLCs) can offer shares to the public and are subject to additional regulatory requirements. Private limited companies (Ltd) have restrictions on share transfers and typically do not offer shares to the public.
A Limited Company is a Separate Legal Entity
A limited company is a separate legal entity that can enter into contracts, incur debts and sue or be sued. It can also own property and pay taxes independently from its owners. The law regulates its ownership and must maintain a range of statutory registers that shareholders (and others) can ask to inspect. These include a record of those who own and manage the company (the Register of Members) and details of people with significant control over the business (the Register of People with Significant Control).
The word “limited” means that the liability of company shareholders is limited to the amount they originally invested in the company. This protects their assets from being seized by creditors. In addition, the separate entity concept provides tax advantages. A limited company can be taxed as a sole proprietorship, partnership, C corporation, or S corporation. In these cases, the company operating agreement must specify how profits, losses and deductions are allocated among shareholders.
A Limited Company is a Tax-exempt Entity
A limited company is a separate legal entity and can own assets and make profits. However, the limited liability structure protects its owner’s assets and income from creditors and other stakeholders. This makes it more attractive to investors and entrepreneurs.
The word “limited” is commonly used as a descriptor for companies, but it does not indicate a particular type of business. Many types of companies use the descriptor, including C corporations and S corporations, which are taxed differently.
Companies registered as limited by shares have a constitution and are subject to the requirements of the Companies Act. These requirements include filing annual returns and keeping financial records. In addition, limited companies must disclose information about their directors and shareholders to the public. They must also designate an agent for service of process, usually the Secretary of State. This person receives a copy of any legal action against the LLC.
A Limited Company is a Partnership
A limited company is a type of business legally separate from its owners. Its members are protected from personal liability for debt and litigation damages.
Unlike a sole trader or general partnership, a limited company is governed by the requirements of the Companies Act and must make regular filings to the Companies House. It also has more tax-planning opportunities.
It is common to see businesses use the abbreviation Ltd., which means limited in the UK. It is a descriptor that all types of businesses can use. LTDs can choose whether or not to be taxed as a partnership or a corporation, and they can usually take advantage of pass-through taxation.
Shares or guarantees can limit an LTD, and its members are not personally liable for the company’s debts or obligations. This arrangement is a step up from an ordinary partnership, which limits the partners’ liability to the value of their investments or any personal guarantees they provide.
A Limited Company is a Limited Liability Entity
A limited company is a business structure that separates the assets and income of a corporation from its owners and investors. It can also protect owners from personal liability in the event of a lawsuit or company failure. In the United States, this entity type is usually called an LLC. The descriptor “Ltd” is often used as a generic abbreviation for all legal entities with limited liability.
In the UK, limited companies are incorporated at Companies House and are subject to regular filings. They also have a formal constitution, which sets out the rights and obligations of the shareholders.
A limited company can choose to be taxed as a partnership or C or S corporation. It can specially allocate income, gains, losses, deductions, and credits to its members on a basis other than ownership percentage. However, the choice of tax regime has significant implications for managing a company.
Other useful links from our Knowledge Centre:
How to Manage Business Finances Correctly and Efficiently
Unlocking Business Potential: Strategies for Long-term Success
The Impact of Sustainability on Ecommerce Businesses
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