What is a limited company?

A limited company is a legal entity formed by a group of people under the Companies Act 1985. As such, it is separate from its shareholders (who own it) and its directors (who run it day-to-day).

In general, a company is limited by shares but there are other possibilities on which we can advise if required. A company can be a private company (denoted by using “Limited” in its name or a public one (denoted by “plc” or “public limited company”). Essentially, the difference between the two is that a public company’s shares can be traded by the general public whereas a private companies cannot.

There are particular requirements before a plc can begin to trade, which are beyond the scope of this note but on which we can advise if required.

The principal benefit of trading as a company is that the shareholders and the directors are not liable for the company’s debts if it becomes insolvent. However, because the company is a separate legal entity there are rules and regulations which affect how it operates and how transactions between the company and its shareholders and directors must be handled.

Any director may also be a shareholder and vice versa but the two roles are different.

In principle, a director is a salaried individual who, with his fellow directors, is responsible for the day-to-day management of the business in return for a salary and, possibly, other benefits in kind. A shareholder invests money in company and in return for his investment receives dividends when the company makes a profit.

The benefit of limited liability comes at the price of stricter requirements on the accounting records that must be maintained and the obligation to file accounts on the public file at Companies House.

A company is governed by its constitution, the Memorandum and Articles of Association, a copy of which must be filed at Companies House. Occasionally, the shareholders themselves may enter into separate agreements between themselves about what happens in the case of disputes and the like but such a company will still need to have a Memorandum and Articles of Association.