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What is a limited company?

Updated: May 17, 2019

A limited company is one of several legal structures a freelancer may choose to run their business – the other common structures being sole trader or through an umbrella company.

A limited company, broadly speaking, is a legal structure for a business in which the liability of each shareholder is limited to their individual investment – this is known as limited liability.

In the UK, limited companies are governed by the rules and regulations contained in the Companies Act 2006, and all company registration and records are managed by Companies House.

Limited companies come in three flavours.

Private & limited by shares (LTD)

Most SMEs are private companies limited by shares. This means the company is divided into slices (shares) and distributed amongst shareholders with equivalent monetary values attached. In the case of a freelancer, 100% of the company (indeed, there is often only one ‘share’!) will usually belong to that individual.

Shares cannot be sold on public markets, and the cash value of shareholders’ stakes may rise and fall dependant on the success of the company. If you are a freelancer operating a limited company, it will be a private company limited by shares in the vast majority of cases.

Private & limited by guarantee

Rather than liability being limited to their initial investment, members of companies limited by guarantee agree to pay a cash sum in the event their organisation goes belly-up. This setup is usually used by charities.

Public limited company (PLC)

A company with shares traded on public markets (the FTSE 500, NASDAQ etc.). Often a private company limited by shares will “go public” once it reaches a certain size, and the company’s shareholders will be able to offer their shares for sale to the public (and usually make a killing in the process).

What about for freelancers and contractors?

There is no upper or lower size limit on limited companies, and so many freelancers and contractors choose to do business through a limited company for a variety of reasons, including:

  • Limited liability – your belongings can’t be touched if your company goes bust

  • Tax efficiency – company taxation rules mean you can keep more of your income through a limited company setup

  • Easier to hire – incorporating makes all your dealings straight business-to-business transactions, meaning your clients don’t have to worry about your personal tax affairs

  • Easier to grow – if your business expands it is easy to issue shares and take on employees.

However, there are disadvantages for freelancers, mostly in the form of additional reporting required from HMRC and Companies House. These are called the Directors Fiduciary Responsibilities and are often taken care of by an accountant – although you can do them yourself if you have a head for figures.

Is a limited company right for my business?

We offer a free consultation with no obligation where we can discuss this with you and help steer you in the right direction. Use our simple online booking for a free consultation to see how we can help your startup.

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