A limited company is a type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors). That makes it very different to operating as a sole trader or being self-employed, where you and your business are considered the same legal entity.
Even if a company has only one individual involved with it and that person is the only shareholder and the only director, the company is still a separate legal entity – and this is an incredibly common set up for small businesses.
That means the company can enter into contracts, and be sued, in its own right. In the event that the company is sued, its directors and shareholders do not have to sell their own assets to pay the debt, unless, in the case of directors, they have been found guilty of wrongdoing or have given personal guarantees. Since the credit crunch, personal guarantees on debts for limited companies have become much more common, with most small business overdrafts requiring some form of personal guarantee.
This legal separation means that directors and shareholders cannot take money out of the company whenever they want. Money the company earns from sales belongs to the company, not to the individuals, and so limited companies usually engage with an accountant to make sure that they are taking money out of the company in the right way – usually through a combination of salary, dividends and Director’s loan account repayments.
The company must file accounts and a confirmation statement each year with Companies House. These are then available for public viewing.
The company must also file a Corporation Tax return with HMRC every year.