What is a Limited Company

Introduction

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for people running a company who want clear answers on tax, payroll, Companies House duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

A limited company is one of the most common business structures in the UK, yet it is also one of the most misunderstood. I regularly speak to people who know they want to “set up a limited company” but are not entirely sure what that actually means in practice, how it works legally, or how it affects tax, risk, and day to day responsibilities.

Some people assume a limited company is simply a more professional version of being self employed. Others believe it is only suitable for large businesses with staff and offices. In reality, limited companies are used by a huge range of businesses, from one person consultants working from home to growing companies with significant turnover and employees.

In this article, I am going to explain clearly and practically what a limited company is in the UK, how it works, how it differs from other business structures, and what the real advantages and disadvantages are. I will also explain the legal and tax responsibilities involved, based on how these companies operate in the real world rather than in theory.

By the end, you should have a solid understanding of whether a limited company is right for you, and what it actually means to run one properly.

The basic definition of a limited company

At its simplest, a limited company is a business structure that is legally separate from the people who own and run it.

When you form a limited company, you create a new legal entity. That entity can:

• Enter into contracts
• Own assets
• Employ staff
• Borrow money
• Make profits
• Pay tax

Crucially, it does all of this in its own name, not in your personal name.

This legal separation is the foundation of everything else that follows, including limited liability, tax treatment, and reporting obligations.

What “limited” actually means

The word “limited” refers to limited liability.

Limited liability means that the owners of the company are only financially responsible for the company’s debts up to a certain limit, usually the amount they have invested or agreed to invest in the company.

In practice, this means:

• Your personal assets are generally protected
• Your liability is limited to your share capital or guarantees
• Business debts belong to the company, not you personally

This is very different from being a sole trader, where there is no legal distinction between you and the business.

However, limited liability is not absolute. Directors can still be personally liable in certain situations, which I will come back to later.

Who owns and runs a limited company

A limited company has two key roles, shareholders and directors. Sometimes they are the same people, sometimes they are not.

Shareholders are the owners of the company. They invest in it and ultimately benefit from its profits.

Directors are responsible for running the company on a day to day basis and ensuring it complies with the law.

In small owner managed companies, one person is often both the sole shareholder and the sole director. In larger companies, these roles are often split.

Understanding this distinction matters, because directors have legal duties that go beyond ownership.

How a limited company is formed

A limited company is formed by registering it with Companies House.

This process is known as incorporation.

When you incorporate a company, you provide details such as:

• Company name
• Registered office address
• Directors
• Shareholders
• Share structure
• Nature of business activities

Once registered, the company exists as a legal entity in its own right. From that point on, it must comply with company law and reporting requirements.

The company name and legal identity

A limited company’s name is protected once registered, and it must usually end with “Limited” or “Ltd”.

The company has its own registration number, which stays with it for life, even if the name changes.

This identity is important because all contracts, invoices, and official correspondence should be in the company’s name, not your personal name.

Mixing personal and company identities is one of the most common mistakes I see and often leads to problems later.

Limited companies and tax

One of the main reasons people consider forming a limited company is tax.

A limited company pays its own tax on profits, known as Corporation Tax. This is separate from the personal tax paid by directors or shareholders.

Corporation Tax is administered by HM Revenue and Customs.

After Corporation Tax is paid, profits can be retained in the company or distributed to shareholders, usually as dividends.

Directors are also taxed personally on any income they receive from the company, such as salary or dividends.

This separation of company tax and personal tax creates planning opportunities, but it also creates complexity.

How money moves in and out of a limited company

Because a limited company is separate from you, you cannot simply take money out whenever you like without consequence.

Money typically leaves the company in one of the following ways:

• Salary paid to directors or employees
• Dividends paid to shareholders
• Reimbursement of business expenses
• Repayment of money the director has lent to the company

Each of these is treated differently for tax and accounting purposes.

Taking money informally without understanding how it should be classified is one of the biggest causes of tax problems in limited companies.

The concept of separate legal personality

Separate legal personality is the principle that the company exists independently of its owners and directors.

This means:

• The company can sue and be sued
• The company owns its assets
• The company owes its debts
• The company continues even if directors change

This is why a limited company can continue to trade even if ownership changes, and why shares can be sold without disrupting the underlying business.

It is also why company money is not your money, even if you own 100 percent of the shares.

Director responsibilities and legal duties

Being a director of a limited company comes with legal responsibilities.

Directors must:

• Act in the best interests of the company
• Keep proper accounting records
• File accounts and returns on time
• Pay taxes when due
• Avoid conflicts of interest

These duties are set out in company law and are taken seriously.

Limited liability does not protect directors who act dishonestly, negligently, or unlawfully.

Ongoing reporting obligations

Running a limited company involves more administration than being self employed.

Key ongoing obligations include:

• Preparing annual accounts
• Filing accounts with Companies House
• Filing a Corporation Tax return with HMRC
• Filing a confirmation statement
• Operating PAYE if paying salaries

These filings have strict deadlines, and missing them can result in penalties or enforcement action.

I often see people underestimate this side of company ownership, which is why good systems or professional support are so important.

Limited companies and credibility

In practice, many people choose to trade through a limited company because of how it is perceived.

Limited companies are often seen as:

• More established
• More professional
• More stable
• Lower risk for customers and suppliers

This perception can matter when dealing with larger clients, tendering for work, or applying for finance.

That said, credibility only goes so far. Poorly run limited companies quickly lose the trust this structure can bring.

Limited company versus sole trader

One of the most common comparisons is between a limited company and being a sole trader.

Key differences include:

• Legal separation between you and the business
• Different tax treatment
• Greater administrative requirements
• Potentially greater tax planning flexibility

Sole traders are simpler to run, but they do not offer limited liability or the same planning opportunities.

In my experience, the right choice depends on income level, risk exposure, and long term plans rather than a single factor.

Limited company versus partnership

Partnerships sit somewhere between sole traders and limited companies.

Traditional partnerships do not offer limited liability, although limited liability partnerships do.

Partnerships can be flexible, but they involve shared responsibility and can become complex if relationships break down.

Limited companies provide clearer ownership structures and continuity, which is why they are often preferred for long term businesses.

Costs of running a limited company

There are costs associated with running a limited company that do not exist for simpler structures.

These can include:

• Accountancy fees
• Companies House filing fees
• Payroll costs
• Software and compliance costs

While these costs are usually manageable, they should be factored in when deciding whether a limited company makes sense financially.

When limited liability can be lost

While limited liability is a major benefit, it is not a free pass.

Directors can become personally liable where they:

• Give personal guarantees
• Trade while insolvent
• Commit fraud or wrongdoing
• Fail to meet statutory duties

I always advise directors to understand these risks rather than assuming the company structure protects them in all circumstances.

Keeping personal and company finances separate

One of the most important practical rules of running a limited company is keeping finances separate.

This means:

• Having a separate company bank account
• Paying business expenses from the company where possible
• Avoiding personal use of company funds
• Recording director loans properly

Blurring the lines between personal and company finances undermines the legal separation and often causes tax problems.

Growth and scalability

Limited companies are well suited to growth.

They allow:

• Shares to be issued or transferred
• Investors to come on board
• Profits to be retained for reinvestment
• Clear succession planning

This flexibility is one of the reasons limited companies are the dominant structure for businesses with growth ambitions.

Is a limited company right for everyone

Despite the advantages, a limited company is not always the best option.

It may not be suitable if:

• Income is very low
• Administration would be burdensome
• Risk exposure is minimal
• Simplicity is a priority

In some cases, starting as a sole trader and incorporating later makes more sense.

Common misconceptions I see in practice

There are several misunderstandings that come up repeatedly.

One is that limited companies automatically save tax. They do not. They offer planning opportunities, but results vary by circumstance.

Another is that directors can take money whenever they like. They cannot, without consequences.

Understanding the structure properly avoids these pitfalls.

The role of professional advice

Setting up and running a limited company is not just about registration. It involves ongoing decisions about tax, compliance, and risk.

An accountant can help with:

• Choosing the right structure
• Setting up payroll and dividends
• Keeping records compliant
• Planning tax efficiently
• Avoiding common mistakes

In my experience, early advice saves far more than it costs.

Final thoughts

A limited company is a powerful and flexible way to run a business in the UK, offering legal separation, limited liability, and planning opportunities. It is also a structure that comes with responsibilities, rules, and ongoing obligations.

Understanding what a limited company really is, and how it differs from other options, is essential before committing to it. When used properly, it can support growth, protect personal assets, and create long term value. When misunderstood or neglected, it can create stress and unnecessary risk.

In my professional opinion, the best outcomes come from choosing the structure that fits your situation today, while keeping an eye on where you want the business to go tomorrow.

You may also find our guidance on how to set up a limited company and how much does it cost to form a limited company helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.