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  • What's a Limited Company?

    Are you looking for information about limited companies? You’ve come to the right place!

    In this article, we will go over everything you need to know about a limited company including what the term actually means, the pros and cons of a limited company, how to set up as a limited company, and the differences between a limited company and a sole trader.

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    What is a Limited Company?

    So what exactly is a private limited company? The term ‘limited company’ can be quite confusing for some. If you’re wondering what a limited company actually is, read on. This section will explain what a limited company is and what makes it unique.

    A limited company is defined as a general form of incorporation that limits the amount of liability undertaken by the shareholders of the company.

    This term refers to a legal structure that ensures the liability of the company members or subscribers is limited to their stake in the company. This can be via commitments or investments. In legal terms, a private limited company is a person.

    In simpler terms, a limited company is a general term for a business organisation where the owner’s assets and income are separate from the assets and income of the company.

    This means that the owners are limited in their potential losses and their personal assets and incomes are off-limits.

    When someone owns a limited company, they have some form of protection. This means that, if the company comes into some financial distress, the personal assets of the business owners are not at risk of being seized by creditors.

    Companies that are registered as a limited company usually have a company name followed by the abbreviated ‘Ltd.” Ownership of a limited company can be transferred easily and many limited companies are passed down through generations.

    A limited company can be limited by shares or can be limited by guarantee. When the company is limited by shares, it is owned by one or more shareholders and managed by at least one director.

    When a limited company is in a guarantee arrangement, this means that the company is owned by one or more guarantors and managed by at least one director.

    The Pros and Cons of a Limited Company

    There are several advantages and disadvantages of a limited company. In this section, we will take a deeper look at those pros and cons.


    You Could Pay Less Tax

    As opposed to sole traders, limited companies do not have to make payments on account. Limited companies pay corporation tax on profits at a lower rate than the general income tax that sole traders pay.

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    Limited companies also don’t have to pay national insurance. However, limited companies are not entitled to personal allowances so the differences in tax savings may not be substantial.

    You Could Claim More Tax Relief on Expenses

    When you register as a limited company, you are entitled to more tax relief on some costs. An example of this is that a limited company can claim certain food and drink expenses at the cost of the business.

    This is different to sole traders who can only claim this type of tax relief on a few occasions in certain specific situations.

    It May Be Easier to Attract Investors

    If you are looking to secure some form of investment in your business, then incorporation could be the right path for you. If you own a limited company, you will be able to sell shares in your business.

    This is different to sole traders who can only get investments through a complex partnership process.

    You Will Have Liability Protection

    A limited company is a separate legal entity to you as a person. This means that the company can own assets, pay bills, and incur debts in its own right.

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    With this in mind, if the company is ever sued, your personal possessions would never be at risk.


    You Will Encounter More Financial Admin

    Sole traders only need to file their self-assessment tax returns once each year. This is different to limited companies as these need to file a set of accounts, a confirmation statement, and a corporation tax return.

    Each director will usually need to file their own self-assessment tax return as well. If you are an employee of your company and take a salary, then you will also need to register the company as an employer and set up and run payroll.

    Directors Have Certain Legal Obligations

    The directors of the company have an obligation to safeguard the company’s assets. It would also fall on you to make a decision to stop trading if the company can no longer survive.

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    If you fail to meet any of these essential responsibilities, then you may be fined or you could even go to prison.

    You Will Face More Rigid Tax Rules

    Directors of a limited company cannot simply withdraw money from the business bank account, unlike sole traders. When a limited company falls into a loss, it can only use that loss against profits.

    Sole traders, however, can use their losses to decrease what they pay for income tax.

    You Will Have Less Privacy Than a Sole Trader

    Some information about a limited company’s accounts are published on Companies House and this information is available for anyone to view. This means that your finances and figures will be visible to the public as well as the registered address of your company.

    Sole Trader Vs Limited Company

    There are a lot of differences between a limited company and a sole trader. In this section, we will take a look at these differences so that you can decide which option may be best for you.

    Below is a table showing the main differences between a sole trader and a limited company:

    You are the business. The business is a separate legal entity.
    You are the owner of the business. You are a shareholder – you hold a portion or all of the share capital of the company.
    You are the manager or the proprietor. You serve the company as the officer as a director.
    In legal disputes, you are personally sued unless you have suitable insurance. In legal disputes, the company will be sued and not the owners. Company owners or directors will only be held liable in very extreme situations.
    You are self-employed and you cannot be your own employee. As a director, this does not automatically make you an employee. For income tax and National Insurance purposes, company officers are treated as employees.
    You pay Class 2 & 4 National Insurance and income tax on your taxable profits each year. The company pays corporation tax on taxable profits. Company tax rates are lower than income tax. Employees and officeholders are subject to NICS and PAYE on their earnings. Many benefits attract income tax too and can result in a NIC charge for the employer. Shareholders are subject to income tax on dividends and some types of distributions.
    You can offset your losses against your income to pay less tax. The company can flexibly offset its trading losses against other income, but not against your income as a shareholder.
    You can withdraw cash from the business at any time with no tax effect. You are taxed on any income withdrawn from the company. If it is distribution, it is taxed as a dividend. If it is earnings, it is under NICS and PAYE. Most benefits received by you or your family are taxable. Shares or securities in the company are given to you at less than market value.
    You can borrow from your business bank account at any time. Borrowing by directors is permitted but there are limits and tax costs. The company will pay a 32.5% tax charge if you borrow from the company and don’t repay it within nine months of the year-end. If the loan is tax-free, there will be a tax charge for the director based on beneficial loan interest.
    You can only have a personal pension. Company schemes can be more beneficial than personal schemes. a SIP or SAS may be used to hold assets used in the company and may have flexibility on borrowing multiples. You are required to consider pension schemes for your employees.
    If the business fails, you will be personally liable for debts. You could go bankrupt. If the company fails, your liability is limited to the amount of unpaid shares unless you have made a personal guarantee for the company’s borrowing. As a director, you may be personally liable if you continue to trade when your company is failing and this is causing losses to creditors.
    VAT registered businesses who are trading over the £85,000 VAT threshold must use MVD functional compatible software that is capable of directly filing the nine-box VAT return with HMRC. VAT registered businesses who are trading over the £85,000 VAT threshold must use MVD functional compatible software that is capable of directly filing the nine box VAT return with HMRC.
    There is no requirement that you prepare accounts for tax purposes, although you may find it difficult to keep on top of your business, collect debts and work out your profits without keeping accounts. You have the option of cash accounting or conventional accounting. You may need annual accounts to complete your personal tax return which includes a balance sheet section. Your accounts are not submitted to HMRC unless you are subject to an investigation. You need to prepare annual accounts under the provisions of the Companies Act. HMRC require full accounts for corporation tax. Accounts must be prepared in accordance with accounting standards.
    When the business or assets used in it are sold, you are personally taxed under the capital gains tax rules. When you sell the business or assets, there is a double tax charge on shareholders. The company pays corporation tax on any profits from the disposal. The shareholders are taxed on the distribution of proceeds. Company shares can be gifted.
    When you die, your business ceases. You can pass it down to the next generation or to the partner in your partnership. When you die, the company lives on. The company’s shares will qualify for business property relief, providing the company is engaged in trade and its activities are not mainly investment activities. There is no relief on outstanding director loans. Assets that are held outside the business qualify for 50% business property relief.
    You can withdraw any amount of profits. Paying a salary to spouse or family members must be commercially justified to be allowable for tax purposes. There is no restriction on salary size, but it is subject to PAYE and NICS. Paying a salary to spouse or family members must be commercially justified to be allowable for tax purposes.
    You can claim tax relief on all expenses to do with the business. You cannot claim any tax relief on personal uses. The company obtains tax relief for expenses to do with the business. If a director incurs private expenses through the company, these expenses may be treated as earnings.
    A sole trader can claim capital allowance on a car without the proportion for private use. There is no adjustment for fuel benefit for you as a sole trader, you just disallow a proportion of your fuel costs for private use. The company obtains full capital allowances on cars, irrespective of any private use. If you use your own car, the company can reimburse you with the HMRC authorised miles rates. Employers are permitted to reimburse company car drivers for business mileage.
    Mobile phones will be subject to private use so a tax add-back is expected on your return. Mobile phones can be provided if the contract is in the company name. This is free of tax. You can only have one company mobile phone per household.
    You can get capital allowances on a computer. An add-back of allowances will apply if you use the computer for personal use too. If you need one to perform your role, your company can provide a computer tax-free.
    Tax-free benefits and incentives don’t apply to the self-employed. Many tax-free benefits and employment incentives can be provided tax-free. You can claim a deduction on your living rates such as your mortgage, electricity, and heating if you work from home.
    You can claim a deduction on your living rates such as your mortgage, electricity, and heating if you work from home. You can claim £6 per week without receipts for home expenses. Alternatively, the company can reimburse you for electricity and heating bills but not your mortgage or council tax bills.
    A sole trader cannot charge rent. A director can set up a license between themselves and the company to rent an office or other space in your home. This will need to be declared as income and rental accounts will need to be prepared for self-assessment tax purposes.

    As you can see, there are many differences between being a sole trader or a limited company. Hopefully, this table has given you some insight into which option may be best for you personally.

    How to Set Up a Limited Company

    Below is a step-by-step guide on setting up a limited company:

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    1. Check if setting up a limited company is right for you. Take a look at the information in the table above to help you with this.
    2. Choose an appropriate company name.
    3. You must appoint at least one company director. Appointing a company secretary is optional.
    4. Decide who the shareholders or guarantors are. You need at least one of these and it can be a director of the company.
    5. Identify people of significant control over your company. These are anyone with voting rights or who own more than 25% of the company shares.
    6. Prepare documents agreeing on how to run your company. You will have to prepare a ‘memorandum of association’ and an ‘articles of association.’
    7. Check what records you will need to keep.
    8. Register your company – you will need an official address for this and you will need to choose a SIC code to identify what your company does. Most people can register for Corporation Tax at the same time as registering with Companies House. If you can’t simply register with HMRC after you’ve registered the company with Companies House.


    In this article, we have gone over everything you need to know about limited companies. This should have shed some light on what a limited company is and how it is different to a sole trader.

    We have also gone over the pros and cons of setting up a limited company and how to set up a limited company.


    Last updated by MyJobQuote on 9th March 2022.

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