A limited company is a business structure incorporated at Companies House as a legal ‘person’. It is entirely separate from its owners, can enter into contracts in its own name, and is responsible for its actions, finances, and liabilities.
The owners of a company are protected by ‘limited liability’. This means that, in most cases, they’re only responsible for business debts up to the value of their shares or personal guarantees.
A limited company must be incorporated as ‘limited by shares’ or ‘limited by guarantee’. Limited by shares companies are owned by one or more shareholders and managed by one or more directors. Limited by guarantee companies are owned by one or more guarantors and managed by one or more directors. The same person can be an owner and director, so you can register a company by yourself or with others.
A company limited by shares is the most popular company structure. It is designed for people who want to run a profit-making business, keep surplus income for themselves, and protect their personal finances and assets with ‘limited liability’.
Limited by guarantee is a type of company that is most commonly used by people who want to set up a non-profit organisation or charity. The owners of this type of company usually reinvest surplus income in the business, rather than taking any profit for themselves.
Limited liability is the extent of financial responsibility that a shareholder or guarantor has for company debts. This means that the individual’s finances and assets are protected beyond what they invest in shares or guarantee to the company.
If a limited company is sued or unable to pay its bills, the owners are only at risk of losing the nominal value of their shares, the amount stated in their guarantees or the money they have already invested in the business. Limited liability is one of the foremost reasons for running a business as a limited company.
Companies limited by shares must issue at least one share. There is no upper limit to the number of shares a company can issue . These shares are owned by shareholders. The nominal amount paid or due to be paid for each share is the limit of each shareholder’s liability.
Companies limited by guarantee do not have shares or shareholders. Each guarantor must agree to pay a fixed sum toward company debts if and when required. This is called a ‘guarantee’. In most companies, the nominal sum of each guarantee is £1. This is the limit of each guarantor’s liability.
Unincorporated businesses like sole traders and traditional partnerships place unlimited liability on their owners because there is no legal distinction between the business and the individual. All business finances, debts, and liabilities are the owners’ responsibility. If a sole trader is sued or their business becomes insolvent, their personal finances and assets are at risk.
The most significant advantage for most people is limited liability. However, there are many additional benefits, including:
There are also a few disadvantages to be aware of, including:
However, more often than not, limited company benefits far outweigh any perceived disadvantages.
As of April 2025, the base rate of employer NIC has increased from 13.8% to 15%. As well as this, the secondary threshold has dropped from £9,100 to £5,000 per year. This means that the tax strategy of using salary combined with dividends for smaller businesses has been significantly eroded.
A limited company can be a more tax-efficient business structure than a limited company when your annual taxable income reaches around £125,140, but it can vary. This is because limited companies pay Corporation Tax on their profits. Company owners can then minimise their personal tax and National Insurance contributions (NIC) by paying themselves a director’s salary and dividends. Directors can also defer tax by leaving surplus income in the business bank account and withdrawing it in a later tax year.
Sole traders do not have the same tax benefits. They pay 20-45% Income Tax (or 19-48% in Scotland) on all taxable earnings, plus Class 4 National Insurance contributions. There is no option for sole traders to minimise their tax or National Insurance liabilities, nor can they defer tax by leaving profits in the business to withdraw later.
If you run your business as a limited company, you will pay 19% Corporation Tax if your taxable profits are £50,000 or less, 25% if profits are £250,000 or more, or you can claim Marginal Relief if your profits are between these two thresholds.
If you run your business as a sole trader, you will pay 20% Income Tax on profits between your tax-free Personal Allowance of £12,570 (if applicable) up to £50,270; 40% on profits between £50,271 and £125,140; and 45% on profits above £125,140. The rates and thresholds are slightly different if you pay Scottish Income Tax .
You can minimise your Income Tax and National Insurance in a limited company by taking part of your remuneration as a salary and the rest as dividends. To achieve the most tax-efficient pay structure for a limited company, you can pay yourself in the following way:
The company will pay 15% employer’s National Insurance through PAYE on your director’s salary above £5,000/year. However, salaries and employer NICs are tax-deductible expenses, so you won’t pay Corporation Tax on this money.
With careful planning, you could reduce your Income Tax and National Insurance liabilities by paying yourself in such a way.
A limited company can leave some of its surplus income in its profit and loss reserves to use or withdraw later. This can be beneficial if removing all of your trading profits in one financial year would cause you to become a higher or additional rate taxpayer.
If you do not require all the funds, you can defer your personal tax by withdrawing some of your profits in a future year when it is more tax-efficient.
It is not possible to do this as a sole trader because there is no legal distinction between business and personal income. This means that Income Tax and National Insurance have to be paid on all profit in the tax year it is earned, regardless of whether the profit is left in the business or taken as personal income.
Rapid Formations offers a range of online company formation packages for companies limited by shares. We also have a tailor-made package for companies limited by guarantee. The application process is simple and affordable, with prices starting at just £2.99 (excluding the £100 Companies House fee). Follow these 4 simple steps to register a new company today:
Within 24 hours, your new company should be registered at Companies House. You will receive your incorporation documents immediately, and you can start trading whenever you like. For detailed guidance on setting up a company limited by shares or guarantee, see our steps to registering a company .