Starting a limited company in the UK is an exciting step for anyone looking to grow their business. We're here to support you with everything you need to know. In this guide, we'll explain how to open a limited company, the main advantages and the full registration process. Let's get started.
What is a limited company?
A limited company is a type of business that has its own legal identity, separate from the people who own or run it. Think of it as a person in its own right - it can make contracts, own property and be responsible for its debts. There are two main types of limited companies in the UK:
Private limited companies (Ltd): These are owned by private shareholders and cannot trade shares publicly. You can learn more about the private limited company advantages and disadvantages here.
Public limited companies (PLC): These can sell shares to the public but have stricter requirements. You can learn more in our full guide to what is a PLC here.
When should I set up a limited company?
You might consider setting up a limited company when your business has grown or if it needs legal and financial protections that aren’t available to sole traders. This decision is often driven by the need for enhanced credibility, greater growth opportunities or more efficient financial management. Below are some of the most common reasons for making the switch:
Tax efficiency
A limited company can be more tax-efficient compared to operating as a sole trader. As a director, you can pay yourself a mix of salary and dividends, which can reduce your overall tax liability. Unlike sole traders, who pay income tax on all profits, limited companies pay corporation tax, which often results in lower tax rates on profits.
Liability protection
One of the key advantages of a limited company is limited liability. This means that your personal assets - such as your home, car, or savings - can be protected if the company incurs debts or faces legal action.
Professional image
Operating as a limited company can enhance your credibility with clients, suppliers, and investors. Many larger organisations prefer to work with limited companies, as it reflects a more professional and established operation.
Growth potential
A limited company structure is ideal if you’re planning to expand your business. It allows you to:
Bring in additional shareholders to raise capital for growth
Attract investors who are more likely to invest in a formal company structure
Scale operations more efficiently, as the company can own assets, enter contracts, and employ staff independently of its directors
When should I change from a sole trader to a limited company?
Transitioning from sole trader to limited company depends on your business’s size, goals and financial position. Here are some indicators:
Increased profits: When profits grow, incorporating as a limited company can reduce your overall tax bill.
Higher risks: If your business faces financial risks, incorporation limits personal liability.
Client preference: Some clients, particularly in the corporate sector, prefer to work with limited companies.
Future expansion: A limited company structure is better suited for growth or attracting investors.
Looking to learn more? Read our full guide to sole trader vs limited companies.
💡Editor's insight:
"There's no specific time when you should convert from a sole trader to a limited company. When we've spoken to sole traders, the general consensus is when your earnings start to pick up and the potential tax savings outweigh the additional costs to run a company."
How to set up a limited company in 8 steps
Setting up a limited company in the UK might seem daunting, but breaking it into manageable steps can make the process straightforward. Here’s a comprehensive guide on how to form a limited company:
1. Choose your company name
Your company name is a critical part of your branding. However, it must also meet legal requirements:
Uniqueness: The name cannot be identical or too similar to an existing company. Use the Companies House name search tool to check availability.
Restricted words: Certain words, like 'Royal' or 'Bank', require special permission to use.
Endings: Private limited companies must include 'Limited' or 'Ltd' in their name unless registered in Wales, where 'Cyfyngedig' is an option.
2. Decide on a registered office address
Every UK limited company must have a registered office address. This will be publicly available on the Companies House register and must:
Be a physical address in the UK (not a PO Box)
Be where official correspondence (e.g., from HMRC) is sent
You can use a professional registered office service if you prefer not to use your home address
3. Appoint directors and shareholders
Directors and shareholders need to provide personal details, including their full name, date of birth, occupation and address. These details are publicly available on the Companies House register. A limited company must have at least:
One director responsible for managing the company and ensuring compliance with legal obligations
One shareholder that owns shares in the company (this can be the same person as the director)
4. Prepare the memorandum and articles of association
There are essential legal documents for forming a limited company, including the memorandum and articles of association.
Memorandum of association: A document signed by all initial shareholders confirming their intention to form the company.
Articles of association: A set of rules about how the company will be run, including the powers of directors and rights of shareholders. Learn more in our guide to what are articles of association.
5. Register your company with Companies House
You can register your company online or by post. During registration, you’ll need to provide:
Company name and registered office address
Details of directors, shareholders, and share capital
A SIC code (see below)
6. Choose a SIC code
A Standard Industrial Classification (SIC) code is used to identify your company’s primary business activities. You can find a full list of codes on the Companies House website. Choose a code that best describes your business.
7. Register for corporation tax
Once your company is registered with Companies House, you must register with HMRC for corporation tax. This must be done within three months of starting to trade. You’ll need your company’s unique taxpayer reference (UTR), which HMRC will send to your registered office shortly after incorporation.
8. Comply with ongoing obligations
Once your company is up and running, you’ll need to meet the annual company filing requirements:
Confirmation statement: Filed annually to confirm that your company details are up to date.
Company accounts: Filed annually with Companies House and HMRC, including a balance sheet and profit-and-loss account.
Corporation tax returns: Submitted to HMRC based on your accounting period.
Top 5 reasons to set up a limited company
Limited liability protection: To protect your personal assets in case of business debts.
Tax benefits: To pay less tax by taking a combination of salary and dividends.
Professional reputation: To enhance credibility with clients and investors.
Ownership structure: To allocate shares to raise funds or reward employees.
Growth opportunities: A limited company is ideal for scaling and expansion.
FAQs
When do you need to open a company?
You should open a limited company if you want liability protection, tax benefits or plan to grow and scale your business.
What documents are needed to form a limited company?
You’ll need the memorandum of association, articles of association and details of directors, shareholders and your registered office address.
Can I open a company on my own?
Yes, you can open a limited company as the sole director and shareholder.
Do I need an accountant to register my company?
No, but an accountant can help ensure your accounts and tax obligations are managed correctly post-registration.
What taxes do limited companies pay?
Limited companies pay corporation tax on profits, and directors may pay income tax and National Insurance on salaries.
Final thoughts
Knowing how to open a limited company is essential for entrepreneurs ready to formalise their business. Whether you’re transitioning from sole trader status or starting fresh, setting up a limited company provides professional and financial advantages. By following the outlined steps and ensuring compliance, you can establish your company with confidence and focus on growing your business.
If you need legal advice for a business matter, get in touch with one of our small business lawyers today.
References
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.