Company Formation

What is a limited company in the UK?

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Opening a limited company is usually the most common approach for anyone starting a business. Unlike a partnership or sole proprietor, a limited firm serves as a separate entity. And that's because it's structured differently with more needs in terms of legal duties and tax.

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Geoffrey M.
Sep 18, 23 · 8 min read
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What Is a limited company?

Public and private limited firms are legal entities that are separate from their directors and owners (shareholders). You can incorporate all limited companies in the UK at the Companies House and get a unique registration number. They must also have a “limited” at the end of their name.

Companies are governed by their article of association, which governs the firm while it operates within the 2006 Company Act.

After registering the limited firm, it gains a corporate personality. This means that it has legal rights, and its obligations are separate from its directors and shareholders.

Your corporation can employ and pay people, enter into contracts with other people, and can be sued or sue.

The limited firm is liable for its debts, and the directors and shareholders are not personally liable. In the UK, there are 4 different types of companies:

  • Unlimited company
  • Company limited by shares
  • Company limited by guarantee
  • Limited company

Advantages of setting up a public or private limited firm

Minimising Personal Liability

The main advantage of opening this type of business is limited liability protection. Basically, your personal assets will never be touched when the business goes into trouble. And that's because it's considered a separate legal entity that guarantees you limited liability.

The separation is the corporate veil.

Professional Status

Opening a public or private limited firm will improve your professional image and status. While your internal management, ownership structure and activities will remain the same, your business will have an improved professional status.

Tax Efficient

Generally, limited companies pay between 19% and 25% corporate tax from profits, while sole traders pay 20% to 45% income tax from the profits.

Instead of withdrawing all the profits annually and pay more personal tax, you can retain it and pay for future operational costs. As the director, you can use the profits to run the venture in the future. You can also differ profits withdrawal to another tax year with the personal tax rate will be low.

Higher Personal Remuneration

You can lower your National Insurance Contributions and Income taxes by combining the director's dividends and salary. By keeping the salaries of the directors lower than the NIC threshold, you won't pay income tax for their earnings.

On top of that, you won't pay corporate tax liability on their salaries; after all, wages are tax-deductible expenses.

Separate Legal Entity

Unlike a partnership or sole proprietorship, when your firm becomes limited, it becomes a legal person. Therefore, it can take loans and enter into contracts using its name. On top of that, you won't be liable. In fact, they're liable for the price of their personal guarantee and unpaid shares.

Disadvantages of setting up public or private Ltd firm

  • Your trading name is subjected to lots of restrictions.
  • Need to hire an accountant to help manage your public and private tax affairs.
  • Requirements are time-consuming.
  • You have to follow a strict procedure when withdrawing cash from the business.

How to set up a limited company in the UK

Has your business started expanding, particularly with an increase in turnover? Then, it's time to form a limited firm. After all, a limited firm has more benefits than a sole proprietorship. To open one, you should do the following:

Step 1: Pick a Name

Start by picking the right business name and add LTD at the end. Make sure your firm's name is unique and with no offensive words. You can confirm the availability of the name in the registry.

Step 2: Appoint Director and Secretary

Generally, you have to appoint directors before registering the firm. You can choose the secretary later.

Step 3: Decide Who the Guarantors and Shareholders Will Be

Being a limited firm, you'll be required to list at least 1 shareholder with 100% shares. But you can still appoint several shareholders, with the one with controlling power owning over 25% of the shares.

Step 4: Prepare the Articles of Association and Memorandum of Association (MOA)

The MOA is a legal document signed by the shareholders agreeing to set up the limited firm. On the other hand, the Article of Association features the rules about running the business. Remember, you can never update the Memorandum after registering it.

Make sure you confirm the records you must keep when opening or running your firm.

Step 5: Register the Venture With the Companies House

Start by registering your business's official address and pick the right SIC code. SIC codes classify your business by industry.

Start with registering for corporate taxes while registering the business at the Companies House at the same time.


Generally, there are about 4 types of limited firms in the UK, so you should first determine which one is for you. Remember, these types of firms have lots of advantages, especially when it comes to formation and filing taxes.

So after preparing the Articles and Memorandum of Associations, you can hire a company registering agent or do it yourself.

How to set up a public or private firm

Generally, there are 4 forms of companies in the United Kingdom. So before registering, you should first find out if you should upgrade your sole proprietorship or partnership. To set up a private or public firm, you should:
HowTo step image

1. Select its legal name

The name should be unique, and make sure you add LTD after it.

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