What is a Limited Company?

A limited company is a business structure where the company is legally separate from its owners, limiting personal financial liability.

Last reviewed: 12 June 2026 | Reading time: 7 minutes | Verified against 12 sources

How a Limited Company Works

When you form a limited company, you create a new legal person separate from yourself. The company:

• Owns its own assets (equipment, property, cash)
• Enters contracts in its own name
• Is responsible for its own debts
• Files its own tax returns
• Continues to exist even if ownership changes

You (and any co-founders) own shares in the company. Most small companies issue 100 shares at £1 each, giving an initial share capital of £100.¹ If the company fails and owes money, creditors can only claim against the company's assets. Your personal liability is limited to your £100 investment (hence "limited").²

Setup Process and Costs

Registering a limited company in England and Wales is straightforward:

1. Choose a company name (must be unique on the Companies House register)³
2. Appoint at least one director (you can be the sole director and shareholder)⁴
3. Decide on share structure (most start with 100 × £1 ordinary shares)⁵
4. Provide a registered office address (can be your home address)⁶
5. Register online at gov.uk (costs £12, processed within 24 hours)⁷

Registration cost

£12 online via Companies House

Processing time

Usually within 24 hours

Annual accountancy fees

£800-2,000 typical for micro companies

Annual obligations

Confirmation statement (£13), accounts filing, Corporation Tax return

Tax Treatment

Limited companies have a different tax structure from sole traders:

Corporation Tax

The company pays 19% Corporation Tax on its profits (2026-27 rate for companies with profits under £50,000).⁸ If your profit exceeds £250,000, the rate increases to 25%. Between £50k-£250k, marginal relief applies.

Extracting Money

You can take money out of the company in two main ways:

1. Salary
Pay yourself a salary (subject to Income Tax and National Insurance). Most directors take a small salary (around £12,570 – the personal allowance) to use their tax-free band.⁹

2. Dividends
Distribute profits as dividends. You get a £500 dividend allowance tax-free (2026-27). Above that, dividend tax rates are:¹⁰

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

The typical tax-efficient approach is: small salary (£12,570) + remaining profit as dividends. This can save £1,000-3,000/year compared to sole trader status for profits above £30,000.¹¹

Legal Responsibilities

As a company director, you have legal duties:

• Act in the company's best interests
• Keep accurate accounting records
• File annual accounts with Companies House (publicly visible)
• File a confirmation statement each year (£13 fee)
• Submit a Corporation Tax return to HMRC
• Declare dividends formally (with dividend vouchers)

Failure to file on time results in automatic penalties (£150 for accounts up to 1 month late, increasing to £1,500 if over 6 months late).¹²

Advantages of Limited Company Status

• Limited liability protects personal assets
• Tax efficiency for profits over £30k
• Professional credibility (many clients prefer Ltd suppliers)
• Easier to raise investment (can sell shares)
• Separate legal entity makes selling the business simpler
• Pension contributions are a deductible business expense

Disadvantages and Trade-offs

• More admin burden (accounts, returns, statements)
• Higher accountancy fees (£800-2,000 vs £300-800 for sole traders)
• Public accounts (anyone can see your filings on Companies House)
• Stricter record-keeping (separate business/personal finances)
• Cannot offset losses against other income (unlike sole traders)

When to Choose Limited Company

A limited company typically makes sense when:

• Your profit exceeds £30,000/year (tax savings outweigh extra admin)
• You work with corporate clients who prefer Ltd suppliers
• You want to protect personal assets from business liabilities
• You plan to raise investment or bring in co-founders
• You want to build a saleable business asset

Below £30k profit, the tax savings are marginal and often don't justify the extra accountancy costs and admin.¹¹ See our Ltd vs Sole Trader comparison for detailed calculations.

Last reviewed: 12 June 2026