Legal structures: the basics

Limited liability companies

Limited companies exist in their own right. This means the company's finances are separate from the personal finances of their owners.

Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

The Companies Act 2006 makes a number of changes that will affect directors and shareholders of limited companies. You can read about the Companies Act 2006 on the Department for Business, Innovation & Skills (BIS) website - Opens in a new window.

Main types

Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
Public limited companies (plcs) must have at least two shareholders and must have issued shares to the public to a value of at least £50,000 before it can trade. View the guide to company formation on the Companies House website - Opens in a new window.
Private unlimited companies - these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.

Set-up

Must be registered (incorporated) at Companies House.
Must have at least one director (two if it's a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be a person.
Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Public limited companies must have a qualified company secretary.

Management and raising finance

A director or board of directors make the management decisions.
Finance comes from shareholders, loans and retained profits.
Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot.

Records and accounts

Accounts must be filed with Companies House before the time allowed for filing those accounts to avoid a late filing penalty.
Accounts must be audited each year unless the company is exempt.
When you file your Annual Return for the first time a letter will be issued to the Registered Office containing the company's authentication code and instructions for use of Companies House web filing services. Please follow the instructions in the letter.

You can find out about company accounts on the Companies House website - Opens in a new window.

Directors are responsible for notifying Companies House of changes in the structure and management of the business.

Profits

Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

Tax and National Insurance

If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
Companies liable to corporation tax must make an annual return to HMRC.
Company directors are employees of the company and must pay both income tax and Class 1 National Insurance contributions on their salaries.

Liability

Shareholders are not personally responsible for the company's debts, but directors may be asked to give personal guarantees of loans to the company.

Subjects covered in this guide

Introduction
Self-employment
Sole trader
Partnership
Limited liability partnership (LLP)
Limited liability companies
Franchises
Social enterprises
Overview of legal structures
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