A limited company, broadly speaking, is a legal structure for a business in which the liability of each shareholder is limited to their individual investment - this is known as limited liability.
If you're wanting to set up a limited company then you should read our helpful article, but if you just want to know more about them then the read on.
Limited companies come in three flavours.
Private & limited by shares (LTD)
Most small businesses or SMEs are private companies limited by shares. This means the company is divided into slices (shares) and distributed amongst shareholders with equivalent monetary values attached. In the case of a freelancer, 100% of the company (indeed, there is often only one 'share'!) will usually belong to that individual.
Shares cannot be sold on public markets, and the cash value of shareholders' stakes may rise and fall dependant on the success of the company. If you are a freelancer operating a limited company, it will be a private company limited by shares in the vast majority of cases.
Private & limited by guarantee
Rather than liability being limited to their initial investment, members of companies limited by guarantee agree to pay a cash sum in the event their organisation goes belly-up. This setup is usually used by charities.
Public limited company (PLC)
A company with shares traded on public markets (the FTSE 500, NASDAQ etc.). Often a private company limited by shares will "go public" once it reaches a certain size, and the company's shareholders will be able to offer their shares for sale to the public (and often make a killing in the process).
What about for freelancers and contractors?
There is no upper or lower size limit on limited companies, and so many freelancers and contractors choose to do business through a limited company for a variety of reasons, including:
- Limited liability - your belongings can't be touched if your company goes bust
- Tax efficiency - company taxation rules mean you can keep more of your income through a limited company setup
- Easier to hire - incorporating makes all your dealings straight business-to-business transactions, meaning your clients don't have to worry about your personal tax affairs
- Easier to grow - if your business expands it is easy to issue shares and take on employees
We've written a helpful article on the main advantages of being a limited company.
However, there are some disadvantages for freelancers, mostly in the form of additional reporting required from HMRC and Companies House. These are called the Directors Fiduciary Responsibilities and are often taken care of by an accountant - although you can do them yourself if you have a head for figures.
Is a limited company right for my business?
It depends, we've written an article on sole trader vs. limited company vs. umbrella company that discusses the pros and cons. You can also check out our "What business expenses can I claim for as a limited company?" article for more information.
Some contractors working through agencies or deemed to be inside IR35 have to work through umbrella companies . Some businesses may prefer the simplicity of working as a sole trader. For personal advice on what is best for you then you should speak to an accountant. We offer a free consultation where our advisors will guide you through this and more. You can call us on 0333 311 8000 or you can book a callback. We’ll be happy to help you find the right structure for your business.
How can I get one?
Through our Company Formations service you can set up your very own limited company for just £10 - we'll even refund the fee if you sign up to Crunch accounting, take up Small Business Insurance, or open a Barclays Business Bank account through our links.
Alternatively, if you like we can set up your company for you for a small fee as part of our joining process if you want Crunch to be your limited company accountants.