‍A limited company is one of several legal structures a freelancer may choose to run their business - the other common structures being sole trader or through an umbrella company.

A limited company is a legal business structure where the liability of each shareholder is limited to their investment.

In the UK, limited companies are governed by the rules and regulations contained in the Companies Act 2006, and all company registration and records are managed by Companies House.

If you're thinking about starting a limited company, our step-by-step guide will walk you through the process. But if you're simply looking to understand the meaning of a limited company, keep reading.

Types of Limited companies

Private & limited by shares (LTD)

Most small businesses or SMEs are private companies limited by shares. This means the company is divided into slices (shares) and distributed amongst shareholders with equivalent monetary values attached. In the case of a freelancer, 100% of the company (indeed, there is often only one 'share'!) will usually belong to that individual.

If you're looking to add shareholders to your limited company, this guide explains the process. Shares cannot be sold on public markets, and the cash value of shareholders' stakes may rise and fall depending on the success of the company. If you are a freelancer operating a limited company, it will be a private company limited by shares in the vast majority of cases.

If you're considering transferring shares to your spouse, you can learn how to do this in this article.

Private & limited by guarantee

Rather than liability being limited to their initial investment, members of companies limited by guarantee agree to pay a cash sum in the event their organisation goes belly-up. This setup is usually used by charities.

Public limited company (PLC)

A company with shares traded on public markets (the FTSE 500, NASDAQ etc). If you're planning on changing your company's registered office address, you can read the full details in this guide. Often a private company limited by shares will "go public" once it reaches a certain size, and the company's shareholders will be able to offer their shares for sale to the public (and often make a killing in the process).

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What about freelancers and contractors?

There is no upper or lower size limit on limited companies, and so many freelancers and contractors choose to take on the responsibilities of a director and do business through a limited company for a variety of reasons, including:

• Limited liability - your belongings can't be touched if your company goes bust
• Tax efficiency - company taxation rules mean you can keep more of your income through a limited company setup
• Easier to hire - incorporating makes all your dealings straight business-to-business transactions, meaning your clients don't have to worry about your personal tax affairs
• Easier to grow - if your business expands it is easy to issue shares and take on employees

We've written a helpful article on the main advantages of being a limited company.

‍However, there are some disadvantages for freelancers, mostly in the form of additional reporting required from HMRC and Companies House. These are called the Directors Fiduciary Responsibilities and are often taken care of by an accountant - although you can do them yourself if you have a head for figures.

Is a limited company right for my business?

It depends, we've written an article on sole trader vs. limited company vs. umbrella company that discusses the pros and cons. You can also check out our "What business expenses can I claim for as a limited company?" article for more information.

Choosing the right business structure depends on your situation. Some businesses prefer the simplicity of being a sole trader, while contractors working through agencies may need an umbrella company. For personal advice, speak to one of our expert accountants in a free consultation. Call us on 01273 257165 or book a callback—we’ll help you find the right structure for your business.

How can I get one?

Through our Company Formations service you can set up your very own limited company for just £10 - we'll even refund the fee if you sign up to Crunch accounting, take up Small Business Insurance, or open a Barclays Business Bank account through our links.

Alternatively, if you like we can set up your company for you for a small fee as part of our joining process if you want Crunch to be your limited company accountants.