What is a limited company?
A limited company is a business registered at Companies House that is legally separate from its owners, whose liability for its debts is limited to what they invested.
What a limited company means
A private limited company (one with "Ltd" after its name) is its own legal person. It owns its assets, signs contracts, owes its debts and pays its own tax. Its shareholders own it, and its directors run it; in most small companies the same one or two people are both.
Because the company is separate, shareholders normally risk only what they paid for their shares. That protection does not cover personal guarantees you sign, or wrongful trading when directors carry on knowing the company cannot pay its debts.
What it has to do
- register at Companies House, with at least one director and one shareholder
- file annual accounts at Companies House and a confirmation statement every year
- file a Company Tax Return and pay Corporation Tax
- run PAYE if it pays any salaries, including to directors
- keep statutory registers and proper accounting records
Example: £80,000 profit in 2026/27
A sole director pays themselves a £12,570 salary. After employer NI of £1,135.50, Corporation Tax of about £13,820 is due on the rest of the profit (with marginal relief). If the remaining £52,480 or so is paid out as dividends, personal dividend tax is about £9,280, leaving take-home of around £55,760. As a sole trader on the same £80,000, take-home would be about £57,710 after income tax and Class 4 NI.
So in 2026/27, drawing every pound out of a company can cost more than staying self-employed. The company comes out ahead when profit is left in the business at Corporation Tax rates, when it makes pension contributions for you, or when the protection of limited liability matters more than the tax.
Why it matters for your business
A company gives limited liability, a more credible face for some clients, and flexibility: profits can be kept in the company at Corporation Tax rates and drawn when it suits you, which helps in uneven years. Some clients, particularly larger ones, prefer to contract with companies.
The costs are more admin, public accounts, directors' legal duties and accountancy fees that are typically higher than for a sole trader. Money in the company is not yours: taking it out without paperwork creates a director's loan.
Directors' duties
Directors must act within the company's powers, promote its success, use reasonable care and skill, avoid conflicts of interest and keep proper records. If the company becomes insolvent, directors must put creditors' interests first. These duties apply even when the company has a single director who is also the only shareholder.
Common questions
Not automatically. If you draw all the profit, a company often saves little or nothing in 2026/27 and costs more to run. It wins when you keep profit in the business, use employer pension contributions or want limited liability. Compare your own figures with the calculators.
Registering online at Companies House costs £100 from 1 February 2026. Formation agents bundle extras such as a registered office address. The bigger cost is the ongoing accounting and filing each year. Most clients find the annual running cost outweighs the formation fee within the first year.