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What Is a Limited Company? (Ultimate Guide)

What is a limited company
Photo by Floriane Vita on Unsplash

A limited company is a business structure comprised of managers (directors) and owners (shareholders), whose liability is limited. In this article, we take a detailed look at both public and private limited companies, as well as their advantages and disadvantages. Before that, we’ll give a more detailed answer to the question, “What is a limited company?”

Before choosing any business structure, it’s important to get tax and legal advice relevant to your specific needs and the circumstances of your business. So, while this article aims to inform you about the basics of the types of limited companies in the UK, it definitely doesn’t constitute legal advice! If you want to learn more about limited companies and other business structures, head over to the Gov.uk website.

 

What Is a Limited Company?

A limited company is a business controlled by managers (directors) and owned by shareholders. It has a separate legal personality from that of its shareholders. This means it’s able to contract in its own name and is responsible for its own debts and liabilities. So, the shareholders’ liability is separate from the company’s, and is limited to the value of their shares. This protects the shareholders’ personal assets from any business losses.

Different Types

There are two broad categories of limited companies in the UK – public limited companies and private limited companies. Regardless of whether it is public or private, you need to incorporate a limited company at Companies House. It must also have a memorandum and articles of association. These are documents setting out the shareholders’ agreement to form the company and the rules of running the company. They must pay corporation tax and file annual tax returns.

Choosing a Name

There are several rules surrounding the naming of a limited company. It can’t be the same as an existing company name, be offensive, or contain a sensitive word or expression. Public limited companies must have “plc” in the name and private limited companies must have “limited” or “ltd” in theirs.

 

What Is a Public Limited Company?

A public limited company is a company owned by shareholders and managed by directors that can sell shares to the public on a stock exchange. It must have a qualified company secretary and at least two directors. At least one of the directors must be an individual, rather than a corporation.

Company secretaries are responsible for overseeing the administration of the company and ensuring it complies with regulatory requirements. There are strict eligibility criteria for someone to be a company secretary, and they are often lawyers or accountants.

There are also onerous reporting and disclosure requirements for public limited companies. For example, they must hold annual general meetings. They must file their accounts within 6 months of the end of the financial year, compared to a private limited company that has 9 months to file. Public limited companies also need to obtain an audit, and the company information provided to Companies House is later made publicly available.

Advantages of a Public Limited Company

The ability of a public limited company to trade shares on the public market has several advantages. It allows a company to raise large amounts of capital to fund growth or pay off debts.

Shareholders can easily buy more shares or dispose of their shares by selling them. Public limited companies can also acquire other businesses by offering them shares. Listing on a stock exchange enhances a company’s visibility, boosting its reputation and credibility.

Disadvantages of a Public Limited Company

One disadvantage of a public limited company is the high barrier to entry. In comparison to other business structures, it’s a complex and time-consuming process to prepare a company to go public. A company must obtain a Certificate of Trading before it can sell shares.

To obtain a Certificate of Trading, the company must issue a minimum £50,000 in share capital and pay 25% of this in full. Similarly, the process of dissolving a PLC can be lengthy and complicated. There are also more regulatory requirements when it comes to running a public limited company versus other business structures.

Public Limited Company Advantages and Disadvantages

The advantages of a public limited company are:

  • Limited liability for its owners (shareholders)
  • The ability to raise potentially large sums of capital
  • Incorporation can improve a business’ reputation and credibility, building confidence in the business

The disadvantages of a public limited company are:

  • It’s one of the most complex and expensive business structures to set up and run
  • Company information is publicly available via Companies House

Public Limited Company Examples

All companies listed on any stock exchange are public limited companies. In the UK, there are numerous examples, including:

  • Those in the insurance and banking sector e.g. Barclays plc, Prudential plc, Aviva plc, NatWest Group plc
  • Supermarket chains such as J Sainsbury plc and Tesco plc
  • Those in the mining and resources sector e.g. BHP Group plc, BP plc, Rio Tinto plc

What Is a Private Limited Company?

A private limited company is a company where the investment is provided by the founding shareholders who can only sell or transfer shares privately. This is the most common form of incorporation, accounting for over 96% of incorporated businesses in the UK.

The key differences between a public limited company and a private limited company are that shares in a private limited company cannot trade publicly and the business can only have up to 50 shareholders.

Limited by Shares or by Guarantee?

A private limited company is either limited by shares or limited by guarantee. A company limited by shares is the most common structure. In this case, the business is owned by the shareholders and managed by the directors, with the company keeping the profits it makes after paying tax.

Shareholders receive a distribution of the profits according to the portion of the company they own (called dividends). Companies limited by guarantee have members instead of shareholders. The members’ liability is limited to the amount of the guarantee set out in the articles of incorporation, and profits are reinvested. Non-profit organisations such as clubs or charities are usually limited by guarantee.

Advantages of a Private Limited Company

There are lower barriers to entry to set up a private limited company. Unlike a public limited company, there is no minimum share capital required. There are also fewer regulatory requirements when it comes to running a private limited company. It must have at least one director, who can also be the sole shareholder.

It’s not uncommon for the directors of a private limited company to control all or the majority of the shares. For example, Sir James Dyson (of vacuum cleaner fame) is a director and the sole shareholder of Dyson Limited. Unlike a PLC, it’s not mandatory for a private limited company to have a secretary, or to conduct annual general meetings.

There can also be tax efficiencies to setting up a private limited company rather than other business structures, such as a sole proprietorship. This is because a company pays corporation tax (currently 19%) as opposed to personal income tax (20-45%). And unlike a salary, dividends are also not subject to National Insurance Contributions.

Disadvantages of a Private Limited Company

Like a public limited company, there’s a high level of administration involved. The company must file annual accounts and various tax returns with Companies House. This can make a PLC out of reach for most small business owners without the resources to keep things running.

Private Limited Company Advantages and Disadvantages

The advantages of a private limited company are:

  • Limited liability for its owners (shareholders)
  • No minimum share capital required
  • Potential tax efficiencies, compared to a sole trader
  • Incorporation can improve a business’ reputation and credibility and build confidence in the business

The disadvantages of a private limited company are:

  • It’s more complex and expensive to set up, run, and dissolve than a partnership or sole proprietorship

Private Limited Company Examples

Given their popularity, there are many examples of private limited companies in the UK. Many well-known UK retail chains are private limited companies, including John Lewis Partnership, River Island, Iceland, Specsavers, and Matalan. Large construction companies such as Laing O’Rourke, Arup, and JCB also fall into this category.

 

Public Limited Company vs Private Limited Company

Public Limited Company

Private Limited Company

Owned by

Shareholders Shareholders (max. 50)

Managed by

Directors (min. 2)

Directors (min. 1)

Company secretary

Mandatory Optional
Shares traded on stock exchange Yes

No

Share capital

Minimum £50,000 (with 25% actually paid)

No minimum

Annual general meetings

Yes

No

Timeframe for filing accounts 6 months

9 months

 

With this in mind, if a business is seeking an injection of capital to fund new projects or wants the visibility that comes with trading on the stock exchange, registering as a public limited company is an attractive option. It’s also not uncommon for a business to initially incorporate as private limited company and later go public once it has matured and needs to raise further capital.

If you want to learn more about the different business structures in the UK, check out our other articles here.

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