A company limited by shares is a commercial (profit-making) business entity that is incorporated (registered) at Companies House as a legal ‘person’, which means that it is legally and financially separate from its owner(s) and director(s).
This type of company is owned by one or more individuals, known as ‘shareholders’ or ‘members’, each of whom holds at least one share in the company. The liability of each member is limited to what they agree to pay for their share(s), and they receive a portion of profits relative to their individual shareholdings.
A company limited by shares is usually set up by people who want to run a commercial (profit-making) business, alone or with others, whilst minimising the risk of personal financial liability if the company were to become insolvent. It is also an ideal business structure for those wishing to add prestige and credibility to their business image, raise capital investment in exchange for shares in the company, or take advantage of more favourable tax benefits.
To set up a private company limited by shares, you are legally required to have at least one shareholder (member) and one director. However, both roles can be held by the same person, which means that you can form a company with just one person.
There is no statutory limit to the number of members and directors that can be appointed, unless you choose to add a specific restriction in the company’s articles of association.
A limited by shares company is owned by individuals known as ‘members’ or ‘shareholders’, each of whom holds at least one share, which represents their percentage of ownership and control. Members may be natural persons (humans) or corporate bodies (companies, organisations, etc).
The founding members are also referred to as ‘subscribers’, because they subscribe their names to the memorandum of association and agree to form and become members of that company.
The most notable benefits of setting up a limited by shares company include:
To discover more, read out blog article on Limited company advantages and disadvantages.
Limited by shares companies enjoy notable tax benefits. They pay a flat rate of 19% Corporation Tax on profits, which is lower than the rates of Income Tax paid by sole traders and partnerships. Additionally, whilst a director’s salary is subject to Income Tax and National Insurance, they can minimise their tax liability by taking a low salary and higher dividends (if they are also a shareholder), which are subject to lower rates of dividend tax.
Other tax benefits include the option to defer tax by leaving profits in the company to withdraw in a future tax year; issuing shares (and thus rights to tax-efficient dividends) to spouses and children; and access to many tax-free benefits and incentives that are not available to sole traders.
The most significant difference between a limited company and a sole trader is that a sole trader business is owned and controlled by one individual, who has unlimited liability for the debts of the business. This is because there is no legal or financial distinction between the individual and the business.
A limited company, on the other hand, is a distinct ‘person’ that is legally and financially separate from its owners (shareholders), which means that shareholders have limited liability for the debts of the company.
There are a number of legal requirements for setting up and running a company limited by shares, including:
Directors are legally responsible for ensuring that a company meets all such obligations.
On an annual basis, limited companies are legally required to file a confirmation statement (overview of company’s registered details on a given date), a set of financial accounts, and a Company Tax Return. They must also keep accounting and other company records, maintain their statutory registers, and notify Companies House and HMRC when certain changes occur.
Additionally, limited companies must pay Corporation Tax on profits and fulfil any VAT and/or PAYE obligations. Directors and shareholders also have to register for Self Assessment and file annual tax returns to report any untaxed income (e.g., dividends, expenses, directors’ loans) received through the company.
To set up a limited by shares company in the UK, you need to file an application to incorporate at Companies House. The simplest way to do this is through Cheap Formation, using one of our online company formation packages, which costs as little as £12.99 (+VAT) for a limited by shares company that is ready to trade within 3-6 business hours (subject to Companies House workload).
As an authorised Companies House e-filing partner, our experienced team is on hand to provide help and advice throughout the entire registration process and beyond. Your application will be reviewed by one of our experts before electronic submission to Companies House, reducing the risk of rejection. Once approved, you will receive digital copies of your new company documents and you can begin trading at any point thereafter.
For more information on setting up a company, please see our support pages to discover the 4 Steps to Forming a Company and Required Information to Form a Company, or contact our customer support team on 020 7871 9xyz.
You can use a limited by shares company for a non-profit enterprise, for example, if you want to sell shares as a fundraising strategy. However, a limited by guarantee company is more widely used by non-profit organisations, and it is a legal requirement for any company that is going to be registered as a charity.
You can change a sole trader business to a limited company structure. This is a popular option for many sole traders who want to grow their businesses or enjoy the many benefits of a limited company, including limited liability for business debts, tax savings, and greater professional prestige.