What is a Company Limited by Shares?
Companies limited by shares, more commonly referred to as limited companies, account for most private companies registered in the UK. This company structure is particularly popular as the company exists as a separate legal entity from the individual directors.
This means the owners have limited financial liability, so their personal finances are protected if the company encounters financial problems.
Limited liability is a major benefit over the sole trader structure whereby the sole trader is liable for business debt. This page provides all of the need-to-know information about private companies limited by shares.
Who is this structure right for?
This structure is attractive to businesses interested in making a profit due to its flexibility in ownership and investment, while also providing liability protection to shareholders. For example:
- Entrepreneurs and Startups: Those looking to limit personal financial risk while attracting investment.
- Small and Medium-Sized Businesses: Companies that want liability protection and flexibility to raise capital through shareholding.
- Growing Businesses: Companies planning to expand or seek outside investment without exposing owners to unlimited liability.
- Family Businesses: Families wanting to keep ownership within the group while protecting personal assets.
Key Benefits
Separate Legal Entity:
The company is distinct from its shareholders and directors, meaning it can own assets, enter contracts, and be sued in its own right.
Limited Liability:
Shareholders' personal finances are protected, and they are only liable for company debts up to the value of their shares.
Shares:
Ownership of the company is divided into shares, which can be bought, sold, or transferred.
You can sell shares to raise funds and grow the business.
Features
Professional Image:
Incorporating improves your business profile, making it more attractive to clients and investors as a reputable, well-structured company.
Corporate Directors:
Another company can be a shareholder or director, but there must always be at least one human director.
Business Continuity:
The company can continue to exist even if the owners pass away, unlike a sole proprietorship.
Name Protection:
Your company name is protected upon registration, preventing others from using the same or a similar name.
Forming a company limited by shares
Incorporating a company limited by shares is incredibly simple. Here's what's required:
- All limited by shares companies must be registered with Companies House and you company name must be unique
- You’ll need a physical registered office address in the same country as the company.
- At least one shareholder and one director are required; one person can fulfill both roles.
- You need to specify up to four Standard Industrial Classification (SIC) codes describing your business activities.
- Details of all People with Significant Control (PSCs) in the company must be declared on incorporation.
- On incorporation Companies House will issue a memorandum of association to state the names of the first shareholders (known as the 'subscribers') and their intention to form the company and take at least one share.
- A governing document called the articles of association must be adopted during the company incorporation process - this outlines the rules and regulations of the company and its owners and its members/officers.
Frequently Asked Questions
What are the advantages of this type of company?
The most significant benefit is limited liability for company shareholders. Their obligation to pay for business debts is restricted to the nominal value of their shares. This means their personal assets – property, car, finances etc. – are secure and cannot be used if the company becomes insolvent. Sole trader businesses do not have this benefit, and the owner is personally responsible for any business debts.
The other benefits of this type of business structure are enhanced professional status, and the ability to effectively plan your company's finances to take advantage of any favourable tax rules.
What is the difference between a sole trader business and a company limited by shares?
Sole traders can employ people to work for them, but the sole trader is wholly responsible for the business and its debts. This is unlike limited companies, as there is no legal distinction between the sole trader business and the individual.
Sole trader accounts are relatively simple compared to limited company accounts and no information about the business or the sole trader is made available to the public.
Limited companies register for Corporation Tax with HMRC, file Company Tax Returns, and pay Corporation Tax on any profits made.
They must prepare and file detailed financial accounts and company records for Companies House and HMRC each year. Information about a company, its directors and shareholders, and its financial accounts are all made available to the public.
Who can own a company limited by shares?
Any person or corporate body can own a company limited by shares. The owners are known as ‘shareholders’, ‘members’ or ‘subscribers’ and they will appoint directors to run the day-to-day activities of the company. In many cases, the shareholders will also be directors in their company.
How many people are needed to set up a company limited by shares?
Only one person is required to register and run this type of company. You must have at least one shareholder and one director but the same person can hold both of these positions.
How many people are needed to set up a company limited by shares?
1st Formations offers online company registration services – simply choose a company name, select one of our five limited by shares formation packages and complete our quick application form with details of your new limited company.
We will send your application electronically to Companies House and your new company will usually be ready to trade within 3 to 6 working hours.
What reporting and filing requirements do private limited companies have?
Limited companies have more filing and accounting responsibilities than sole trader businesses. They are required to file a confirmation statement and annual accounts to Companies House each year.
If the company is trading, it must also file a Company Tax Return and statutory accounts with HMRC and pay any Corporation Tax due.
A confirmation statement is a document containing details about your company at a certain date. This is used by Companies House to confirm and maintain the accuracy of their records and the information that is displayed on public record.
Annual ‘statutory’ accounts contain information about your company’s financial activity throughout the year – sales, expenditure, assets and liabilities. This must be filed with Companies House, and as part of the Company Tax Return for HMRC.
Company Tax Returns must be filed with HMRC if your company is actively trading. Your tax return will determine the amount of Corporation Tax you must pay.
You must also report any significant changes to your limited company to Companies House and, in some cases, HMRC.
