What is Limited Company?

Full Definition

A limited company is a legal entity in its own right, entirely separate from the people who own it (shareholders) and run it (directors). Because the company itself, not its owners personally, is legally responsible for its debts, the personal liability of shareholders is normally limited to the amount, if any, still unpaid on their shares -- this is the defining feature that distinguishes a limited company from operating as a sole trader or ordinary partnership, where the individual is personally liable for all business debts. The most common form for small and medium UK businesses is a private company limited by shares; a private company limited by guarantee (common for non-profits) and a public limited company (which can offer shares to the public and must meet stricter capital and governance requirements) are the other main variants. A limited company must be incorporated at Companies House, is taxed separately from its owners through Corporation Tax on its profits (19% up to £50,000 of profit, 25% above £250,000, with marginal relief tapering the rate in between for 2026/27), and must file annual accounts and a confirmation statement. Directors extracting money from the company typically do so through a mix of a modest PAYE salary and dividends (taxed separately at dividend tax rates), which is usually more tax-efficient overall than an equivalent sole trader profit taxed entirely through Income Tax and Class 4 National Insurance, though the calculation depends heavily on the profit level and changes to dividend and Corporation Tax rates each year.

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