What is a limited company?

What makes a company different from just trading?

A sole trader and the business are the same person. A limited company is a separate legal person: it owns the assets, signs the contracts, owes the debts and pays its own tax. You, as shareholder, own the company; you, as director, run it. Those are two different hats and the law cares which one you are wearing.

The separation is what gives the 'limited' in the name. If the company fails, its creditors can pursue the company's assets but not, in the normal run of things, your house. That protection is real but not absolute — personal guarantees on loans and leases, and wrongful trading, can both reach past it.

The price is admin. The company files annual accounts and a confirmation statement at Companies House, both public, and a corporation tax return with HMRC. Money cannot simply be taken out: it comes as salary through PAYE, as dividends from profit after tax, or as a director's loan that must be repaid. Every one of those has a record behind it.

A worked example

A web designer runs her business through a limited company. In the year it invoices £60,000 and spends £12,000 on software, equipment, insurance and an accountant. She pays herself a salary of £15,000 through PAYE, which is a cost to the company like any other.

The company's profit is therefore £60,000 less £12,000 less £15,000, so £33,000. Corporation tax is charged on that at the rate on gov.uk for the year. What remains after tax belongs to the company, and she can pay it to herself as dividends, leave it in the company as retained profit, or a mix.

The dividends are then taxed on her personally through Self Assessment. Whether that whole arrangement beats simply being a sole trader depends on the figures, the year and her circumstances, which is why the honest answer is 'run both calculations' rather than a rule of thumb.

What are the ongoing obligations?

• —Annual accounts filed at Companies House within nine months of the year end, and with HMRC alongside the corporation tax return.
• —A confirmation statement to Companies House each year confirming who owns and runs the company.
• —Corporation tax paid nine months and one day after the year end; the return itself is due within twelve months.
• —PAYE run for any salary, including the director's, with real-time submissions to HMRC.
• —Self Assessment for the director if there are dividends or other untaxed income.
• —Registers of directors, shareholders and people with significant control kept up to date.