What is a Limited Company?
A plain-English guide to what a limited company is, how it differs from a sole trader or partnership, and the key pros and cons of the structure.
A significant proportion of people become confused about what exactly a limited company is, and how it differs from other business structures such as sole trader and partnership. The purpose of this article is to answer those questions and explain the pros and cons of the limited company business structure.
A significant proportion of people become confused about what exactly a limited company is, and how it differs from other business structures such as sole trader and partnership. The purpose of this article is to answer those questions and explain the pros and cons of the limited company business structure.
A significant proportion of people become confused about what exactly a limited company is, and how it differs from other business structures such as sole trader and partnership. The purpose of this article is to answer those questions and explain the pros and cons of the limited company business structure. testing page
What is a limited company?
As the name suggests, a limited company business structure limits the liability of the owners or shareholders. A limited company is considered a separate legal entity and is therefore responsible for its own actions and consequences.
The veil of incorporation protects the personal assets of the owners if the business runs into cash-flow difficulty and cannot afford to pay its liabilities. In practice this means business creditors can only recover as much of their money as can be generated by selling the limited company's assets — compared with a sole trader in the same situation, who may have to sell some or all of their personal assets to cover the creditors' loss. Personal assets can include a personal car, a house or money in a personal bank account.
The pros of a limited company
- Personal assets are protected because liability is limited.
- The corporate veil separates the actions and consequences of the owners from the company.
- It gives the business a professional look.
- Investors are more willing to invest in a limited company than in sole traders or partnerships, because shares are easy to transfer.
- Companies usually outlast their founders — they can continue indefinitely (for example, Apple Inc. after Steve Jobs).
- Raising capital is easier, as more shares can be issued at any time, provided there are private investors to buy them.
- It can be tax-efficient to run a business as a limited company, as dividends attract less tax.
- Beneficial tax treatment — at the time of writing, companies with profits of up to £300,000 paid only 19% corporation tax.
The cons of a limited company
- Stricter reporting requirements, such as the memorandum and articles of association and annual confirmation statements, in addition to annual accounts.
- Less privacy, as information about directors is published publicly.
- There are certain legal requirements that limited companies must adhere to.
- Directors' obligations under the Companies Act 2006 must be fulfilled.
- The cost of running limited company accounts may be higher.
Published 1 August 2018. This article is general guidance, not advice, and may reflect tax rules and figures that have since changed. Please get in touch for advice tailored to your circumstances.
Ready to work with an accountant who's genuinely on your side?
Book a free, no-obligation consultation and we'll show you exactly how MMR can help — with a clear fixed-fee quote and no pressure.