Setting up a limited company

Thinking about setting up a limited company in the UK? Learn more about how they work and the steps to set one up.

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What is a limited company?

A limited company is a business limited by either shares or by guarantee. If you have a company that makes a profit it’ll likely be a company limited by shares. This means the company is legally separate from you, the company’s finances are separate from your personal ones, you’ll have shares and shareholders and, once you’ve paid corporation tax, you can keep any profit the company makes.

A limited company by guarantee is similar to a limited by shares company, as with both you are legally separate from your company and have independent finances. However, a ‘by guarantee’ company is most often classed as a not-for-profit which means you have guarantors and – importantly – any profits you make are reinvested back into the company. Should the company distribute any profits to its owners, it will lose its eligibility to seek charitable status.

When setting up your limited company, you’ll also need to figure out if it’ll be a private limited company (Ltd) or a public limited company (PLC). The main difference between the two is a PLC’s shares are traded publicly on the stock market whereas an Ltd is private. Another key difference is that PLCs must have two directors whereas an Ltd only has to have one.

A simple way to think about it is PLCs tend to be large organisations (like a series of chain stores) that trade on the stock market whereas an Ltd may have a smaller presence (like a local retailer).

What’s the difference between a limited company, a partnership, an LLP & sole trader?

Before setting up as a limited company it’d be a good idea to consider the other options to check which aligns with your business needs.

A Limited Liability Partnership (LLP) is a business run by two or more people and the partners aren’t personally liable for any debts the business might accrue. Their liability (as suggested by the name) is limited to the amount they invest in the business, and all profit shares and responsibilities are set out in an LLP agreement. They’re individually responsible for paying the tax on their share of the income as if they were self-employed.

A general partnership is similar, though slightly different, to an LLP. Profits are shared between the partners and they’re also individually responsible for paying their tax. They won’t have an LLP agreement in place however and the partners are legally liable for the debts and obligations of the partnership. The partnership isn't a separate legal entity from the individuals.

A sole trader (or sole proprietor) in comparison tends to be a single owner who is self-employed and often working by themselves (although they can technically employ people). Sole traders are solely responsible for their own business and debts, and there isn’t a distinction between the person and their business.

Why set up a limited company?

Setting up as a limited company can bring some benefits to you and your business.

Firstly, it legally separates you from your business so you’re protected from personal liability with regard to covering business debts or legal costs. Limited companies are also subject to Corporation Tax on their profits, with the small profits rate set at a flat rate which can be more favorable than the personal income tax rates that sole traders or partners may face.

As a limited company, your company name is protected and other businesses cannot use the name or one that is similar when trading.

You’ll also be able to offer any employees shares in the company which could increase motivation and staff loyalty. And as a shareholder you could get dividends, if the company is in profit.

A limited company has more options when it comes to getting finance. You can sell shares to new investors and have access to some loans reserved for incorporated businesses.

These extras available to limited companies also bring some added complexity. Whereas sole traders and partnerships have simpler structures and taxing systems, limited companies need to gather more detailed accounting data for each tax year.

Setting up a limited company may also cost more as you might need legal input to ensure your business structures are legally sound.

If you’re a private limited company you also won’t be able to trade shares with the public and certain information about the company is available within the public domain for anyone who might wish to look you up.

To figure out if setting up a limited company is right for your business needs, it could be useful to chat to an accountant. Find a bookkeeper or accountant near you.

How to set up a limited company

Setting up a limited company can seem daunting so here’s a simple step by step process to help you get it right.

  1. Choose a name. First you need to double check you’re not using someone else’s. You can check that on the UK government's website. Also check for existing trade marks. Watch out for making your company name too like someone else’s and make sure to end your name with either ‘Ltd’ or ‘Limited’.
  2. Appoint directors and company secretary. Your company has to have at least one director. This person will be legally responsible for running the company, including keeping company records, and filing your accounts and company tax return. Colleagues can be hired to help with these tasks, like a company secretary, but the director will be where the buck ultimately stops.
  3. Decide on shareholders. To set up a limited company you need to have at least one shareholder, which can simply be you as the director. If you have more shareholders, your registration will need to state how many there are and what their shares are worth. You’ll also need to provide information on what share of dividends each shareholder gets, whether they can cash in their shares for money, if they can vote on company matters and, if so, how many votes they get. These are called ‘prescribed particulars’.
  4. Identify people with significant control (PSC). These are people who might own or otherwise control your company, including yourself. You have to tell Companies House who these people are. A PSC is someone with (at least) 25% of shares in a company and 25% share in voting rights, as well as the right to appoint or remove a large proportion of the company’s board of directors. Full PSC guidance can be found here.
  5. Prepare company documents. When registering you’ll need two different documents: the ‘memorandum of association’ and ‘articles of association’. The memorandum will be automatically created if you register your business online or, if you plan to register by post, you’ll need to include a legal statement signed by all shareholders in agreement to form the company. You can find a template for that on the UK government’s website. Articles of association are the rules agreed by yourself and any shareholders, directors and company secretaries about how to run the company. You can create your own or use the pre-created standard ‘model articles’.
  6. Organise your company and its accounts. Paperwork is always a headache but it can be made easier if you start off on the right foot. Make sure you have set up systems to keep records of both the company itself as well as financial and accounting records. For details of what you need to keep track of there’s a full list on the UK government’s website. You can hire an accountant or bookkeeper to help with your record keeping.
  7. Register the company. Finally you’re ready to register the company! To do this you’ll need your company’s official address (it must be a physical building within the country you’re registering in) and to choose a SIC (Standard industrial classification) code that describes what your business does.

How long does it take to set up as a limited company?

Setting up online as a limited company can be super quick. Within 24 hours you could be officially registered with Companies House. If you’re planning to set up by post you’ll need to fill out form IN01. It’ll take a little longer though you can expect to be registered within 8 to 10 days.

Want help with your registration? No problem. You can find experienced accountants and bookkeepers in the Xero advisor directory.

What does it cost to register a limited company?

There’s a small fee payable to Companies House. You can find the latest fees on the UK government’s website. It’s worth noting that registering online is both cheaper and quicker.

The main responsibilities include managing your accounts and records which Xero’s accounting software can help you with. Additionally, you’ll need to prepare and submit your financial end of year reporting on time, which Xero can also assist with.

Anything else? You’ll also need to keep Companies House up to date with any changes to your company, for instance a change in address or any new PSCs. A full list of responsibilities can be found on the UK government’s website.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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