Limited Company Hub > Fundamentals > What is a Limited Company?
What is a Limited Company?
A limited company is a legal entity that limits the liability of its owners to only what they have invested in the company. Limited companies may be incorporated by shares or by guarantee.
They can also take ownership of property and borrow money in its name. It protects the owners from personal liability for the debts and obligations of the company.
The limited liability that it provides its directors and shareholders ensures any debt that the company takes on will remain inside the company.
It also allows you to showcase yourself as a professional business rather than a personal hobby.
How a Limited Company Works
In its most basic form, a limited company is an entity that combines a person’s ownership of assets with their obligation to repay debts.
The combining of these two aspects forms a legal entity that can own property and take on debt.
Ownership of the legal entity is divided into shares, which are assigned to individual owners.
Money borrowed by the company is the obligation of the owners to repay unless the owner assigns the obligation to another party.
Debt can be passed on in various ways, such as through a loan guarantee from another person.
If a limited company is unable to repay its debt, it will not be collected from outside the business from personal assets such as your house.
Each year, the company must abide by certain obligations. The obligations you need to meet are dependant on how your business operates, but will include things such as an annual set of accounts of confirmation statement.
Private Company Limited by Guarantee
A limited company by guarantee is a type of limited company that does not have shares, the main characteristic of most companies registered as LTDs. Therefore, there is no price for the company’s shares to be calculated.
Instead, an LTD`s financial obligations are guaranteed by its members or subscribers who are known as the guarantors.
These members guarantee the repayment of the company’s debts, as well as the fulfilment of any legal obligations.
A limited company by guarantee is normally created for ‘not for profit’ purposes which is term most know as a ‘non-profit organization’ or ‘charity’.
Any profits the business does make will be reinvested back into the company.
Limited by guarantee companies cannot have a share capital and are therefore owned and controlled by all its members.
These members do not have shares and so, cannot sell them if they need to.
This can make it difficult for non-profit organizations to secure funding as they are not able to give investors shares of the company.
Companies are required to have at least one director and one member upon incorporation.
These directors will be given a salary from the company and can be appointed by outside governing bodies such as local authorities or charities who are providing support to the non-profit.
Unlike companies that are limited by shares, a non-profit organization does not need to have the word “limited”; or other variations of it, at the end of their company name.
This is subject to certain criteria, however.
Ltd by guarantee companies are formed in a ‘not for profit’ structure.
The profits that the company makes cannot be withdrawn by its directors and are restricted to being reinvested into the company for assets or debts.
Private Company Limited by Shares
Companies that are limited by shares means they are owned by shareholders who have certain rights and control over the company.
For example, a director may need a shareholder’s vote to make changes to the company.
A shareholder’s obligation to pay for debts within the business is restricted to the nominal value of their shares.
Personal assets such as property, can not be used as collateral, even if the company becomes insolvent.
The majority of limited companies have ‘ordinary’ shares.
This means that each director gets one vote per share on any company decisions and receives dividend payments throughout the financial year.
A limited company provides limited liability to its shareholders, ensuring that all debts stay within the business and that personal assets are not at risk.
This is a huge advantage for anyone operating as a limited company.
Shareholders are the owners of a company limited by shares.
These can also be known as ‘members’ or ‘subscribers’ and will be involved in the running and day-to-day operations of the company.
Typically, shareholders are usually also directors within the business.
As a limited company, the directors and shareholders are responsible for the obligations that the business must abide by.
Typically, depending on how the company is structured, this can include an annual set of accounts, confirmation statements, VAT returns, and Corporation Tax returns.
These types of companies have higher transparency than most. All of your financials will be visible to other members, suppliers, customers, and even the general public.
These can be accessed via your set of accounts that will be served on the Companies House database.
Whilst it can help with the legitimacy of the business in certain circumstances, it also means that the directors and shareholders have their personal information displayed on public record.
Public limited company (PLC)
A public limited company is a form of company that offers shares of its stock to the general public; where the buyers have limited liability of those shares and cannot be held responsible for any losses in excess to what they paid for the shares.
A PLC operating in the UK must have a minimum share capital of £50,000 and include the letters ‘PLC’ in their name to communicate to investors that the company is a publicly traded operation.
As with a private limited company, most PLC’s are subject to ‘ordinary shares’ where the shareholders of the business are the owners and responsible for running the company.
Most companies opt to operate as a PLC as they can be given much greater access to raising capital and offering liquidity to their shareholders.
However, it could also mean that the company is subject to higher volatility as it is determined by the financial markets.
A PLC has the same obligations as a private limited company, such as producing an annual set of accounts, abiding by VAT regulations, and providing Companies House with a confirmation statement each year.
However, PLC’s also have additional obligations.
Each year, the company must hold an annual meeting open to all its shareholders.
Being public can mean that your company is more vulnerable to pressure from these shareholders and even takeover bids.
A company shareholder is a person; sometimes a company or institution, who owns at least one share of a company’s stock.
Being a shareholder comes with certain rights and responsibilities within the company, such as the right to vote on important decisions of a corporate manner, the right to attend annual meetings issued by the company, and the right to claim a proportion of assets if the company is to be liquidated.
A shareholder of a limited company is also subject to receiving a distribution of the company’s profits or losses.
Profits within the company are usually distributed as dividends throughout a financial year.
If the LTD makes a loss, the price of their shares can drop, which in effect, means they are losing money.
The guarantor of a company limited by guarantee is the rightful owner of the company.
Guarantors usually appoint directors to run and manage the company, though in most cases, these are the same people.
If your company is limited by guarantee, you are responsible for having at least one guarantor at all times.
This member is responsible for a variety of processes such as:
- Forming the company
- Appointing and removing directors
- Paying the value of their guarantee upon the company’s request
- Making significant decisions within the company
- Determining directors authorisation
- Deciding on the objectives of the business
People with significant control (PSC)
A person with significant control (PSC) is a member who owns or controls the company. A PSC can also be referred to as a ‘beneficial owner’.
When forming a limited company you must declare who the people with significant control are.
This is typically the people who are setting up the business or closely associated with the shareholders.
A company can have more than one PSC and can be changed at a later date.
When registering your PSC’s you will be given multiple options to choose from for each person.
The options are as follows:
- more than 25% of shares in the company
- more than 25% of voting rights in the company
- the right to appoint or remove the majority of the board of directors
To register yourself, or someone else as a person with significant control you must confirm a list of details in your PSC register.
The details you need to appoint someone as a PSC are as follows:
- date of birth
- nationality and country of residence
- correspondence address – known as the ‘service address’
- home address (this must not be disclosed)
- the date they became a PSC of the company
- the date you entered them into your PSC register
- all natures of control which apply
You will also need to include their level of shares and voting rights as detailed above.
If you need to make changes to your records of PSC information, you can do so by sending this information to Companies House.
You must do this within 14 days of the change.
To send this updated information to Companies House you must have registered and have an online account or do so using third-party software.
You can elect to keep your PSC information at Companies House which will be available for public record.
The information displayed will include their full name and date of birth.
However, the person’s home address will not be available to the public, unless it is also used as their service address.
Operating as a limited company offers its members limited liability. This is what is known as a separate legal entity.
A separate legal entity ensures that members, directors, or shareholders are not personally responsible for the company’s debts.
Personal assets such as property and vehicles cannot be used as collateral and will remain safe, even if the company goes into liquidation.
The liability of the members is only limited to the amount that they originally agreed to pay for their shares.
Usually, this is a nominal value such as £1 per share.