What is a limited company, and should my business become one?

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What is a limited company?

There are two primary types of limited companies. Those limited by shares and those limited by guarantee. The first is the most common in businesses, while the second is normally for non-profit organisations such as charities.

Limited companies are formed at Companies House, which means they become their own legal entity. It is completely separate from the business owner in terms of its finances and liabilities. As an extension of this, the business owner become protected by “limited liability”, so they are only responsible for business debts up to the amount of their investment or guarantees provided for that business.

This is one of the main advantages of becoming a limited company, as sole traders can be held responsible for all the business debts.

Should my business become limited?

This is one of the most common questions that our sole trader clients ask. The answer depends on lots of factors including your personal situation, future plans and the level of tax you might pay to HMRC. Everyone’s situation is different, so although the ‘man down the pub’ or your friends may think you should become a limited company, it might not make financial sense to you or your business.

If you operate as a sole trader, you can take money out of your account as and when you please, making sure you are paying tax on any profits calculated when your personal return is completed.  However as a limited company this money belongs to the company and you would need to have income paid to you either via wages or by receiving dividends.

Limited companies have several legal obligations such as having to file annual accounts and annual confirmation statements, a tax return to HMRC and report any employees’ payments in real time to HMRC. This is in addition to the personal tax return which every director who receives a salary or dividends of a limited company still must submit. However, this is only if you take money out of the business.

Sole traders only need to complete a personal tax return, so this is clearly a much simpler option.

As you can see, there are many factors to consider when deciding if your business should be a limited company or not.



  • Your business and personal finances will be separate
  • More paperwork
  • You have more options with your post-tax profit
  • You may end up paying more tax
  • You’ll legally own your business name
  • Your tax and accounting may become more complicated
  • It may be easier to get investment
  • More legal duties
  • You may get more tax relief
  • Less privacy


For more information please call the office on 0161 236 7677.

Alternatively contact us here https://www.lloydpiggott.co.uk/contact/