A company limited by shares is an incorporated entity that is legally separate from its shareholders and responsible for its own debts. The personal liability of shareholders is limited to the value of their shares, hence the term ‘limited by shares’. This type of company is one of the most popular legal structures for profit-making businesses.
Companies limited by shares can be privately owned (a ‘private company’) or publicly owned (a ‘public limited company’ or ‘PLC’). The main difference is that shares in PLCs can be traded on a stock market, whilst shares in private companies cannot. Typically, only larger organisations and startups with high-growth potential trade as public limited companies.
In this post, we discuss the key features and benefits of a private company limited by shares. We also explain the legal requirements, the procedure for setting up a company in the UK, and your obligations as a company director and shareholder.
Key features of a company limited by shares
In the UK, companies are incorporated under the Companies Act 2006. This primary piece of legislation governs the formation, management, and regulation of all types of companies in the United Kingdom.
When running a company, the shareholders and directors must comply with the Act and the provisions set out in the articles of association. The articles form the company’s constitution—a set of written principles and rules about how the company must operate, as decided by its shareholders.
The key features of a private company limited by shares are as follows:
1. Incorporated at Companies House
To run a new or existing business as a limited company, you must incorporate it at Companies House—the UK Registrar of Companies. The legal process of incorporation is also known as company registration or company formation.
It involves submitting an application to the Registrar, confirming that the company’s activities will be lawful, and agreeing to comply with the requirements of the Companies Act 2006.
Upon incorporation, the company comes into existence as a distinct legal person responsible for its own liabilities. The Registrar then displays and maintains the company’s details on the public register of companies.
2. Owned by shareholders
A company limited by shares is owned by shareholders, who are the members of the company. Shareholders agree to take at least one share in the company. A share represents a portion of the business, so the number of shares someone holds determines how much of the company they own and control.
You can set up a company with just one shareholder or multiple shareholders. They can be natural persons or corporate entities (e.g. other companies). This flexible ownership structure means you can form and own a company by yourself or jointly with other people.
Either way, you also have the option to sell new or existing shares in your business after incorporation. For example, to raise additional capital, bring in a new business partner, or grow the business.
As a shareholder, you have certain rights and obligations. These usually include the right to appoint directors, vote on the outcome of important business decisions, and receive dividends if the company makes a profit. However, members’ rights can vary depending on the types of shares the company issues.
3. Managed by directors
Directors are the people who manage a company’s day-to-day affairs on behalf of its members. They must ensure all activities are lawful, comply with the statutory requirements applicable to companies, and try to make the business successful.
A private limited company must have at least one director who is a natural person. There is usually no limit to the number of directors a company has. They are appointed at the discretion of shareholders and must act within their powers in accordance with the articles of association.
However, it is common for the same people to be both shareholders and directors in a company, especially in startups and small firms. This means you can set up, own, and manage a company alone or with others. You can also appoint new or additional directors at any time after incorporation.
4. Provides limited liability protection
Limited liability is a legal concept that protects members and directors of a limited company from being personally responsible for company debts and actions. Their liability to company creditors and other third parties is limited to the nominal value of their shares (which is usually £1 per share).
The only exceptions are where members or directors provide personal guarantees on the company’s behalf (e.g. for loans, contracts, or leases) or act unlawfully or negligently in their roles.
Limited liability is one of the main advantages of running a business as a limited company. It gives entrepreneurs the freedom to take calculated business risks without fear of losing their personal assets. Of course, this doesn’t mean that company owners can act recklessly and without regard for creditors. It simply provides a layer of protection if something goes wrong.
5. Exists as a distinct legal person
A limited company is a distinct legal person, separate from its shareholders and directors. This means it has the legal capacity to own property and other assets, borrow money, enter into contracts, sue and be sued, and be declared bankrupt (insolvent) in its own name.
As such, a limited company is legally responsible for its actions, debts, and other liabilities. It also means that business assets held in the company’s name, including profits from trading, belong to the company. Therefore, you cannot treat company finances as your own unless you remove money from the business in one of the following ways:
- director’s salary
- dividends from shares
- reimbursement of business expenses
- a director’s loan
The legal capacity of a company is in contrast to the sole trader structure, where there is no legal distinction between the business and the individual. A sole trader and their business are one and the same. They personally own all business assets and have unlimited liability for business debts.
6. Company ownership divided into shares
One of the defining features of a company limited by shares is that its ownership is separated into parts known as shares. Every shareholder must take at least one share in the company. Their shareholdings represent their percentage of ownership, the extent of their rights, and the limit of their liability for company debts.
If you’re going to be the only shareholder in a company, you can issue just one share to yourself. This share would represent the whole company, giving you 100% ownership and control. However, you’d still have the option to create more shares if you wanted to sell or gift shares to other people, such as investors, new business partners, or family members.
When setting up a company with more than one shareholder, you need to decide how much ownership and control each person should have and then issue shares accordingly. For example, if you want to form a company with one other person and have equal stakes in the business, you could issue two shares and take one each. You would both have 50% ownership and control of the company.
These are very basic examples, but they give you a general idea of how shares work in small companies. Where there are multiple shareholders, you can also issue different types of shares to vary each person’s voting rights or entitlement to dividend payments.
7. Public disclosure of company information
Corporate transparency is one of the requirements of incorporation. As such, most of the information you provide to Companies House is publicly disclosed on the register of companies. This is free to access online.
The register’s purpose is to provide open access to corporate data for the benefit of government agencies, financial institutions, investors and creditors, and the general public. This transparency helps to reduce fraud, encourage compliance, and build consumer trust.
8. Paying Corporation Tax on profits
Unlike sole traders and partnerships, companies pay Corporation Tax on the profits they make from trading, investments, and selling business assets for more than they cost. Corporation Tax applies at a rate of 19%-25%, depending on the company’s total annual profits.
As a company director and shareholder, any money you extract from the business as personal income is taxed separately. However, this provides the potential for tax efficiency. You can minimise the tax liability on your personal income by:
- Paying yourself a small director’s salary up to the Lower Earnings Limit—you won’t pay any Income Tax or National Insurance on this income, and the company won’t pay Corporation Tax on the salary since wages are a tax-deductible expense.
- Taking the rest of your income as shareholder dividends—companies pay dividends from profits after tax, so the rates of personal tax on dividends are lower than the rates of Income Tax.
With a company, you also have the option to leave profit in the business rather than extracting all of it as personal income and paying additional tax. This can be beneficial if you want to reinvest it in the company or avoid taking yourself into a higher Income Tax band in a particular tax year.
This isn’t the case for sole traders and members of partnerships. These individuals pay Income Tax and National Insurance on all business profit in the year it is earned, regardless of whether they extract it for personal use or reinvest it in the business.
Consequently, running your business as a company rather than trading as a self-employed person can be more tax-efficient. This is typically the case for individuals who are higher-rate or additional-rate taxpayers subject to UK Income Tax up to 45% (or 48% in Scotland).
9. Perpetual succession
Since companies are legal entities in their own right, they enjoy continuous existence irrespective of changes in ownership or management. This is a fundamental legal principle known as perpetual succession.
A limited company only ceases to exist when it is formally dissolved at Companies House. Consequently, you can sell or transfer ownership of a company limited by shares (or parts of it) to other people.
Perpetual succession ensures that the personal decisions and mortality of any one person do not impact a company’s ability to continue operations without interruption.
10. Enhanced professional image
Consumers and organisations often view limited companies as more established, reputable, and trustworthy than other business structures. This is partly due to the additional reporting and disclosure requirements of companies. Moreover, certain organisations only award contracts to limited companies rather than self-employed individuals.
As a result, incorporating as a limited company may boost your professional image, make your business more appealing to a wider range of consumers and suppliers, and improve your chances of obtaining credit or investment.
Why would I set up a company limited by shares?
In the UK, a company limited by shares is the most popular legal structure after the self-employed sole trader model. Designed for enterprises that primarily exist to make a profit for their owners, it is suitable for businesses of all sizes operating in any industry.
Whilst the sole trader structure is ideal if you’re just starting out, running a side hustle, or have small profits, it’s not the best choice for everyone. A limited company can be more beneficial if you’re an established business, operating in a competitive or high-risk industry, generating significant profit, or looking to attract investors and grow your business.
How to form a company limited by shares in the UK
Setting up a UK company is relatively quick and simple, particularly when using the services of an online company formation agent like Rapid Formations.
Typically, it only takes around 5-10 minutes to complete an online application and submit it to Companies House. The Registrar will then process and approve the application within 3-6 working hours (it may take up to 24 hours during busier periods)
To register a company online through Rapid Formations, simply follow these steps:
1. Choose a company name
The first step in the company formation process is to choose a name for your new company. To comply with the rules and restrictions on company names, it must not:
- be the same or too like the name of an existing company on the public register at Companies House
- be an offensive name or include words that would constitute an offence
- imply a connection with the UK government, a devolved administration, a local authority, or a specified public authority
- include any ‘sensitive’ words or expressions set out in the regulations unless you have permission to use them
- include certain characters, punctuation, signs, or symbols prohibited under the regulations
- consist of or include computer code
- be a name that, in the opinion of the Secretary of State, intends to facilitate the commission of fraud
- give the false impression that the company is connected with a foreign government, an agency or authority of a foreign government, or an international organisation whose members include two or more countries or territories (or their governments)
- be prohibited from re-use following a direction from Companies House or an order from the Company Names Tribunal
Your company name must also end with ‘Limited’ or ‘LTD’ (or ‘Cyfyngedig’ or ‘CYF’ if it’s a Welsh company) unless you have an exemption from Companies House.
Use the online company name checker on our homepage to find out if your proposed company name is available to register and whether it contains any sensitive words requiring approval.
2. Select a company formation package
We offer a range of company formation packages for all types of companies, each of which provides different features to suit the needs of your business. Select one of the following packages to set up a company limited by shares in the UK:
- Basic Package – £52.99
- Privacy Package – £69.99
- Privacy Plus Package – £99.99
- All Inclusive Package – currently on sale for £139.99 (normally £239.99)
- Scottish Package – £69.99
- Non-Residents Package – £159.99
- Non-Residents Plus Package – £239.99
All of our company formation packages include the Companies House filing fee of £50.00, a complete set of digital company documents (including the certificate of incorporation) and statutory company registers, a free business bank account, and filing of your first confirmation statement (a legal requirement of all companies).
If you’re unsure of anything or need help to form your company, you can contact our team of London-based experts for help and guidance. We can also complete your order by telephone if required.
3. Pay for your order
Before entering your details in the company formation application, you need to pay for your package and any additional extras you’ve chosen.
Upon making payment, you’ll be presented with the online application form to complete at your convenience.
You’ll also receive a confirmation email, receipted invoice, and login details for our Online Client Portal, where you can check the progress of your order and manage your company after incorporation.
4. Enter your company details
Our online application to register a limited company is easy to fill in, with helpful explanations and prompts provided at every stage.
You will need to enter the following details about your new company and the people who will own and control it:
- Company name—remember to include ‘Limited’ or ‘LTD’ at the end
- UK jurisdiction of incorporation—choose from England & Wales, Wales only, Scotland, or Northern Ireland
- Standard Industrial Classification (SIC) code to describe the company’s business activities—you can choose up to four SIC codes
- Registered office address—this will be the company’s official contact address, and it must be situated in your chosen jurisdiction of incorporation
- Registered email address to receive official emails from Companies House
- Details of every director
- Details of every shareholder
- Information on people with significant control (PSCs)—the PSCs are usually the shareholders
- Articles of association—most companies choose to adopt the default Model articles from Companies House, which we provide with every package
Our support page on the Required Information to Form a Company lists the details you need to enter for each director, shareholder, and PSC. To make the process as easy as possible, make sure you have all of the information to hand before starting the application.
Once you’ve completed and reviewed the form, you must provide a few details for ID and address verification purposes. This is a legal requirement of company formation but it’s very straightforward.
Finally, we will submit your application to Companies House for processing and notify you by email once approved. This email will also contain digital (PDF) copies of your incorporation documents. And that’s it—you can start trading through your new company whenever you like.
Do I need to live in the UK to set up a company?
You don’t need to be a UK resident or citizen to set up a limited company in the UK. You can form a company as a non-UK resident and run your business from anywhere in the world. Our article on UK company formation for non-residents explains everything you need to know.
Your legal obligations after forming a company
As the director of a UK limited company, you have several obligations to fulfil for Companies House and HMRC. These include the following:
- Register for Corporation Tax with HMRC within 3 months of starting to trade
- Register for VAT when your company’s taxable income exceeds £90,000 within any 12-month period
- File annual accounts with Companies House
- File a confirmation statement at Companies House at least once every 12 months
- Prepare a Company Tax Return with full annual accounts for HMRC
- Report any change of company details to Companies House
- Keep company and accounting records, including up-to-date statutory company registers
- Register as an employer and operate PAYE if you intend to hire staff or pay yourself a director’s salary
- Register for Self Assessment and file an annual Self Assessment tax return – this will be necessary if you need to report and pay tax on dividends
- Adhere to name and trading disclosure requirements on company signage, stationery, and promotional material
You are legally responsible for these duties even if you appoint other people to perform such tasks on your behalf, such as a company secretary or an accountant. Failure to comply with all statutory obligations can result in fines, prosecution, and director disqualification.
Difference between companies limited by shares and limited by guarantee
Both types of companies are incorporated at Companies House as distinct legal entities and provide limited liability protection to their members.
Companies limited by shares are owned by shareholders, and the liability of those members is limited to the value of their shares. In contrast, companies limited by guarantee have guarantors rather than shareholders, and the liability of those members is limited to the value of their personal guarantees to the company.
Since there are no shares of shareholders in companies limited by guarantee, they are typically (but not exclusively) used by charities and not-for-profit organisations, such as amateur sports clubs, membership organisations, and community groups.
Thanks for reading
We hope you’ve found this post informative. If you have any questions or would like to speak to someone about setting up a company limited by shares, please comment below or contact our company formation team.
Excellent article! These company limited by shares tips provided me with some insights for my own accounting solutions UK business.
Thank you for your comment on our recent blog post!
We are very pleased that you have gained some tips and insights for your own business.
Kind regards,
The Rapid formations Team