When you run a business, you may want to keep your personal finances separate from those of your company. That’s when you might start thinking about registering your business with the UK government’s Companies House and setting up a limited company.
In this guide, we’ll cover:
- What a limited company is and how it differs from being a sole trader
- The pros and cons of running your business as a limited company
- How to set up a limited company if you decide this option is best for you and your business
What is a limited company in the UK?
Put simply, a limited company is a way of running a business where the legal and financial identity of the company is separated from the people who run it.
Limited companies are registered at Companies House, which is the UK government body responsible for registering and dissolving companies. It also maintains company records and stores essential information about the way that companies run.
It can be easier to understand what a limited company is when you compare it to the other main business structure in the UK: being a sole trader.
In the UK, you have to register as a sole trader once you earn more than £1,000 a year from self-employment. Sole traders have what’s called “unlimited liability” for their business. If the business is sued or if it goes bankrupt, the sole trader’s personal finances and assets are at stake to cover the debts.
But if you run a business as a limited company, it will have one or more “directors” who make decisions for the company and have “limited liability”. This means that they can only be held responsible for their share in the business and their personal assets are protected.
Limited companies will have the abbreviation “Ltd.” after their business name. They’ll also be able to sell shares of their business on the stock market and they’ll pay tax differently to sole traders. More on this later.
Who can set up a limited company?
Theoretically, any business can be registered as a limited company. Even self-employed people who have no employees can complete the application and run their business in this way.
Many sole traders choose this option to keep their personal and business finances completely separate. In this case, they’d become the only director of the limited company and would pay themselves a salary from the business accounts.
You might decide to form a limited company if:
- You’ve been a sole trader for a while and have evidence that your business model is viable and sustainable long term
- You have a large turnover and want to reduce the amount you pay in income tax
- You want to expand your business and generate income by selling shares on the stock market
Can I set up a limited company on my own?
Yes, you certainly can.
The process can be a little complicated, so if you feel like you need some extra support, you might want to hire an agent or accountant to help you navigate things. If you’re pretty business savvy, it’s possible to work through the steps on your own, however.
Pros and cons of becoming a limited company
As with any business decision, you have to weigh the pros and cons when you’re deciding whether to set up a new business as a limited company or make the switch from being a sole trader to a Ltd.
What are the advantages of a limited company?
First, let’s look at the benefits:
- Limited liability: The legal separation between director and business means that, if you own a limited company, you won’t lose all your personal assets if the company gets into financial trouble.
- Longevity: When the company is a separate legal entity, it can continue after you retire or if you’re unable to work. This gives security to the company’s employees.
- Credibility: The application process to become a limited company is reasonably complex, and the thorough checks on the company continue for as long as it’s trading. This lends more credibility to your small business. Some people also assume that limited companies are larger than they actually are, and they may be more willing to put their trust in those businesses.
- Tax efficiency: Limited companies must register to pay corporation tax within three months of the date they start trading. You might find that paying yourself a salary as a director and paying corporation tax on the profits of your business leads to a lower tax bill than paying income tax on your total income as a sole trader.
- Fundraising: If your business has the potential to grow, but you lack the funds to do this alone, you might be able to generate money to fund expansion by selling shares on the stock market.
What are the disadvantages of a limited company?
Although there can be benefits for your finances and your reputation, there are some disadvantages to setting up a limited company too.
- Corporation tax returns can be complex. Although you may have less tax to pay, the process of submitting your annual accounts can be more time consuming and you may end up paying an accountant more. Company directors also have to do self-assessment tax returns for the money they draw as a salary.
- There’s a lot of paperwork involved during the registration process and throughout the year. Limited companies have to record their business decisions, meetings, finances, and the personal details of the stakeholders in their business. This is true even if you’re the only director.
- There can be additional charges. Companies House charges a small fee to register your business (£12 payable by credit or debit card if you register online or £40 if you do it by post). On the other hand, registering as self-employed is free.
- Everything is on the public register. From your business address, to your turnover, your financial statements, and the minutes of your meetings, all the information about your business is on public record and can be found online. This transparency is important, but you might not be comfortable with having some details made public — if you run your business from your home address, for example.
How much tax do I pay as a limited company? A quick note on tax
Since tax is quite an important factor, it’s worth knowing how much tax you’ll pay as a limited company.
Corporation tax, which you’ll pay both from trading and from the sale of investments or assets, is currently set at 19%.
There’s no tax-free allowance for a limited company.
How to set up a limited company in the UK
If you’ve weighed your options and decided that it’s best to structure your business as a limited company, you can start the registration process at any time by working through the following steps.
Research your options
Before you decide to become a limited company, make sure that you thoroughly research all the choices available. For example, you might be able to enter into a business partnership or register as a social enterprise instead.
Choose a company name
When you register your business at Companies House, it has to have a unique name. This means you’ll have to do some checks on your business name, as well as any logos or slogans you want to use.
- Make sure that the name has not been registered by another business already
- Make sure that the name you want to use is not trademarked
- Check that any logos you want to use are unique, or at least that they differ substantially from another trademarked design
- Consider the domain name you want to use for your website and check if it’s available
- Check that the name you want to use is appropriate and available in any other countries you might want to expand into in the future
Appoint directors and a company secretary
Wondering who can be a company director? Anyone can be a company director as long as they’re:
- 16 years or over
- Not bankrupt
- Have a UK address
- Not disqualified from being a director
(This doesn’t mean that anyone should be a director, however. Choose your people wisely.)
And what does a company director do? It’s their job to oversee the company, making sure that it follows both the law and its own rules (which are laid out in the articles of association, which we’ll discuss later). Even if some of this work is done by someone else in the company or outsourced, the directors are ultimately responsible and can be fined or prosecuted if they don’t fulfil their responsibilities.
You’ll also need a company secretary, who will be responsible for ensuring that your company works in line with all the financial, legal and statutory requirements that apply to you. They’re a key part of your strategic team, too.
If you’re a sole trader with no employees, you might decide to be your company’s only director. In this situation, it’s not necessary to have a secretary — you can take care of these responsibilities yourself.
Appoint shareholders and guarantors
Legally, a company needs to have one shareholder and one guarantor (for very small companies, they can be the same person, and they can also be a director).
Once you’ve identified these people, you have to write their details down on a list of “people with significant control” (PSC) of your company. If someone has voting rights in company decisions or if they have more than 25% of the shares, they’re a PSC.
Prepare the official documents
There are two very important legal documents for your limited company. They lay out the way the company will operate and dictate the responsibilities of the company directors.
- The memorandum of association is signed by the shareholders and guarantors as proof that they agree to form a company. This can be created automatically if you register your limited company online, or you can use a template form if you’re registering by post.
- The articles of association are the rules agreed by the shareholders, guarantors, and directors. You can use standard “model articles” as the basis of your articles of association or write your own. The articles should explain the records the company has to keep and how the company’s finances will be organised.
You’ll also have to decide what to record as your registered office address. This has to be a physical address in the same part of the UK that your company is registered.
If you run your business from home, it can be a good idea to keep your address private by using a PO box business address, which you can set up online or by post with Royal Mail.
Register your company
Once all this paperwork is in place and everyone knows the role they have to play, decide which Standard Industrial Classification (SIC) code you‘ll operate under and use this to register at Companies House. SIC codes break down each industry into extremely specific categories. For example, code 10520 is for businesses that make ice cream, while 10511 is for liquid milk and cream, and 10521 is for butter and cheese.
Companies House will notify HMRC that you’ve registered a limited company, but you should also register with HMRC so that you can start paying corporation tax. Remember, you’ll need to do this within the first three months of setting up your limited company.
Opening a limited company: How to get started
Although it can be more complicated than operating as a sole trader and it comes with many responsibilities, running your business as a limited company can also have a number of advantages for your finances and reputation. It can also help you to expand your company when you’ve gone as far as you can on your own.
If you’re ready to set up a limited company, your first port of call is gov.uk to find out more or start the registration process. You might also be able to get more information and expert advice from your accountant, financial advisor, or business mentor to decide if this is the right option for you.
People also ask
What is the main purpose of a limited company?
The main purpose of a limited company is to separate a business’ debts and finances from the personal finances of the person who’s running the company.
People may also choose to structure their business as a limited company when they need additional investment to allow their business to grow and reach its full potential.
What’s the difference between public and private limited companies?
The abbreviation Ltd. after a company name stands for “private limited company”.
If a company has PLC in its business name, it’s a public limited company with stocks and shares that the general public can buy. These companies usually have a larger turnover than private limited companies. They also have a more extensive formal structure, requiring a minimum of two directors and a secretary. They also need to hold an annual general meeting for their shareholders.
What’s the minimum turnover for a ltd company in the UK?
There is no minimum level of revenue or turnover you need to meet before you can form a limited company in the UK.
According to Companies House, a small limited company has a turnover of £10.2 million or less and fewer than 50 employees. Companies with a turnover of less than £623,000 and fewer than 10 employees are classed as “micro-entities”. But if they have at least one director and issue at least one share, both these categories of small businesses can be structured and treated as limited companies.