What is a limited company?
Definition of a limited company
A limited company is a type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors). Even if a company has only one individual involved with it and that person is the only shareholder and the only director, the company is still a separate legal entity.
That means the company can enter into contracts, and be sued, in its own right. In the event that the company is sued, its directors and shareholders do not have to sell their own assets to pay the debt, unless, in the case of directors, they have been found guilty of wrongdoing or have given personal guarantees.
This legal separation means that directors and shareholders cannot take money out of the company whenever they want. Money the company earns from sales belongs to the company, not to the individuals.
The company must file accounts and a confirmation statement each year with Companies House. These are then available for public viewing.
The company must also file a Corporation Tax return with HMRC every year.
Find out more about the differences between limited companies and sole traders.
Example of a limited company:
Emily is the sole director and shareholder of a company called Accounts in English Ltd. When the company makes a sale, that money belongs to the company.
Accounts in English Ltd can pay Emily a salary as a director, or it can pay her dividends as a shareholder if it has enough profit to do so, or it can repay her for any business costs she pays for personally. Apart from that, if she takes any money out of the company's bank account, there may be extra tax to pay.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.