What is a Limited Company?
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what is a limited company?
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
What is a Limited Company?
A limited company is a type of business with a distinct legal identity, separate from those who own it (the shareholders) and those appointed to manage it (the directors). It is a business structure that limits the liability the company’s owners are exposed to.
In the event the limited company faces financial hardship, the shareholders’ personal assets are not at risk beyond their investment in the business. This is different from sole traders who do not have a legal distinction between the owner and the business itself.
As a limited company is a distinct legal entity, it can enter contracts in its own name, employ staff, sue and be sued, and is responsible for its debts and liabilities.
What Does ‘Limited’ Company Mean?
The ‘limited’ refers to the legal protection that shelters the shareholders of a business against personal liability from the debts and liabilities of the business. As a limited company is a legally distinct entity, with finances separate from its shareholders, the shareholders’ assets are not at risk should the firm face financial difficulties or legal issues.
With business structures like sole traders, where there is no separation of business and individual, the owner is personally responsible for any debts if the business fails. With limited liability, shareholders are only obligated to cover the company’s debts to the extent of their original investment.
It is for this reason that limited companies are so popular with contractors. Unless there is fraud or serious wrongdoing, the amount you risk losing is restricted to the capital initially invested (the nominal value of shares held).
Types of Limited Company
In the U.K., there are three types of limited company: (i) private company limited by shares, (ii) private company limited by guarantee, and (iii) public limited company.
i) Private Company Limited By Shares
A private company limited by shares is the most popular structure, designed for those wanting to run a for-profit business. It is the structure used by UK contractors.
Ownership of the company is divided into shares and distributed between shareholders. Each shareholder’s percentage of ownership and voting rights depends on the value of the shares they own. Profits are distributed to shareholders in the form of dividends, paid out in relation to each individual’s percentage of ownership. If you own 50% of the shares, you receive 50% of the profits.
In medium and large limited companies, shareholders appoint directors to manage day-to-day activities. In smaller companies, the directors are likely to be the shareholders themselves.
In many ‘micro’ limited companies, including those run by contractors, there is a single shareholder. That shareholder owns 100% of the company, has complete control over its activities, and is entitled
ii) Private Company Limited By Guarantee
A private company limited by guarantee is commonly used by those wanting to set up a ‘not-for-profit’ organization or charity.
There are no shareholders in companies that are limited by guarantee. Instead, they are owned by ‘guarantors’ (also known as members). These guarantors agree to pay a fixed amount of money to the company if it cannot meet its financial obligations. Any surplus income is reinvested in the business rather than withdrawn as profit.
iii) Public Limited Company
As in a private limited company, a public limited company is divided into shares. The difference is that a public limited company can offer their shares to the general public, whereas a private limited company cannot.
This structure is rarely found in new businesses and never found in contractor-owned businesses. It’s more likely to be found in larger, more established companies which have reached a specific size and decided to ‘go public’.
What is a ‘Personal Services Company’?
A personal services company (‘PSC’) is simply another name for a private limited company set up by a contractor to provide their services to clients. They’re most often used in Outside IR35 arrangements, with the company acting as an intermediary between contractor and client.
In most situations, the company is owned 100% by the contractor; they are the sole shareholder and director.