What is a limited company?

A limited company is a separate legal entity that is formed to run a business. The company’s directors are responsible for all legal and financial decisions. The company’s assets and liabilities are completely separate from your own personal finances.

In this article, we aim to give you an explanation of the meaning and responsibilities of limited companies.

The meaning of limited liability

As the limited company is separate from its owners in law, that means it:

• Can enter into contracts in its own name, including employing staff
• Is responsible for its own actions, and can sue and be sued
• Has the legal right to the money it makes from sales and can keep its profits
• Is responsible for paying its own debts and liabilities

This is why a limited company is popular for small businesses. Owners are protected by ‘limited liability’, so unless there’s fraud or serious wrongdoing, their losses if the company fails are strictly limited. If the company cannot meet its debts or liabilities, the owners usually risk losing only:

• For shareholders, the nominal value of the shares they hold.
• The amount of any guarantee (for members of companies limited by guarantee);
• Any amounts they’ve already invested in the limited company; and
• The amounts they’ve already invested in the limited company and have made to it.

Types of limited companies

Private limited company by shares

Most small businesses (SMEs) in the UK operate as private limited companies by shares. This means the company is divided into shares, which are owned by shareholders and represent a financial stake in the business. In many cases, particularly for freelancers, a single individual owns 100% of the company, often represented by a single share.

If you want to add shareholders to your limited company, it is important to understand the process. In a private limited company, shares cannot be traded on public markets, and a shareholder’s stake can increase or decrease depending on the company’s performance. For freelancers running a private limited company by shares, this structure is by far the most common.

Private limited company by guarantee

In a company limited by guarantee, members do not hold shares. Instead, they agree to contribute a fixed amount of money if the organisation becomes insolvent. This structure is most commonly used by charities and other non-profit organisations.

Public limited company

A public limited company (PLC) is a company whose shares are traded on public stock markets. Examples of these are the LSE or NASDAQ. Unlike private companies, its shares can be bought and sold by members of the public.

Many companies begin as private companies limited by shares and choose to go public once they reach a certain size or stage of growth. When a company goes public, its shareholders can sell their shares on the open market, which can significantly increase the value of their investment.

Statutory obligations

A limited company’s financial year is usually a 12-month period for which accounts are prepared. Every company must prepare its annual accounts within 9 months of its financial year-end. The annual accounts report on the company’s performance and activities during the financial year. The financial year starts on the day after the previous financial year ended or, in the case of a new company, on the day of incorporation.

A company must also prepare a corporation tax return within 12 months of the end of its accounting period.

Limited companies are governed by the Companies House under the strict rules of the Companies Act 2006. For more information, see our article on the secretarial duties and responsibilities of limited companies to learn more about the statutory duties of companies and their shareholders.

Keeping financial records

Every company, whether or not they are trading, must keep accounting records. As a minimum Every company, whether or not they are trading, must keep accounting records. As a minimum, these must contain:

• entries showing all money received and expended by the company
• a record of the assets and liabilities of the company

A company must keep its accounting records at its registered office address or at a place the directors consider suitable. The records must be open to inspection by the company’s officers at all times. Private limited companies must keep accounting records for 6 years from the end of the last financial year they relate to

Filling responsibilities

The directors of every company are responsible for preparing and filling annual accounts with The directors of every company are responsible for preparing and filing the annual accounts with Companies House no later than 9 months and 1 day after the company’s accounting period ends. These are called statutory accounts. Generally, statutory accounts must include:

• a profit and loss account
• a balance sheet signed by a director on behalf of the board, and the printed name of that director
• notes to the accounts
• group accounts (if appropriate)
• a director’s report signed by a secretary or director and their printed name.

However, there are exceptions to the above rules depending on whether the company is a small or a micro company.

The company’s board of directors must approve the accounts before they send them to the company’s members:

Remember, all companies must file their statutory accounts at Companies House by the due dates. Failure to file the company accounts by the due dates will result in a penalty for late filing and ultimately closing down your limited company.

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