What is a limited company?
A limited company is a separate legal entity from its owners, with its own tax position, limited liability and a formal structure for running a UK business.
A limited company is one of the most common ways to run a business in the UK. ‘Limited’ is short for ‘limited liability’, which means that the company has its own legal identity and exists separately from the people who own and run it.
This separation shapes how the business pays tax, how money is taken out and how risk is managed. For many business owners, it provides structure, clarity and flexibility as the business grows.
It also means that company debts and personal finances are kept separate, as long as the directors meet their legal duties and don’t sign any personal guarantees on company loans or agreements.
How does a limited company work?
Once registered with Companies House, a limited company exists as its own legal entity. It can:
enter into contracts;
own assets;
earn income;
borrow money;
pay tax in its own name.
Most limited companies have two key positions of responsibility. Shareholders own the company and benefit from its success. Directors are responsible for running the business day-to-day and making decisions on its behalf.
In many owner-managed businesses, the same person is both shareholder and director, which means they own the company and control how it’s run. If they sell or step down, the company continues to exist in its own right.
How is a limited company taxed?
A limited company pays Corporation Tax on its profits. This is the tax charged on the company’s trading income after allowable business expenses have been deducted.
Corporation Tax is separate from the personal tax paid by directors or shareholders. The company settles its tax position first, and any money taken out is then assessed under personal tax rules, depending on how it’s withdrawn.
How do you pay yourself from a limited company?
Money withdrawn from a company as a director’s income is taxed based on how it’s taken. There are three established and compliant ways to do this, and many directors use a combination of them:
Salary is paid through Pay As You Earn and treated as employment income.
Dividends are paid from retained company profits and taxed at dividend rates, reflecting that Corporation Tax has already been paid at company level.
Employer pension contributions can also be made by the company and are usually deductible for Corporation Tax.
The balance you use depends on profitability, cash flow and future plans. Regular reviews using up-to-date figures means that withdrawals remain affordable and consistent with your company’s wider financial position.
What’s involved in running a limited company?
Running a limited company comes with clear legal and reporting responsibilities. Some sit with the director, while others are often handled with the support of an accountant. These duties include:
Preparing and filing annual accounts, typically with an accountant’s support
Submitting Corporation Tax returns, usually prepared by an accountant and approved by the director
Keeping accurate accounting records, which remains the director’s responsibility, even where bookkeeping is outsourced
Filing a confirmation statement with Companies House
Operating PAYE and VAT where required
Directors also have ongoing duties under company law. These include acting in the company’s best interests and keeping an eye on its financial position.
With the right systems and professional support in place, these responsibilities become part of the normal running of the business and are easier to manage alongside day-to-day work.
Limited company or sole trader?
A limited company and a sole trader are set up and taxed in different ways, and the difference affects how you run the business day to day.
With a limited company, the business exists separately from you. It earns its own income, pays its own tax and is responsible for its own debts. This creates a clear line between personal and business finances.
There’s more reporting involved, such as company accounts and Corporation Tax returns, but the structure gives more control over how income is taken and planned over time.
As a sole trader, you and the business are the same thing. All profits are treated as your personal income and taxed through Self Assessment. The reporting is simpler but personal and business finances are closely linked, and income is taxed as it arises.
In practice, being a sole trader can feel more straightforward to run. A limited company brings more structure and formality. The right choice depends on how your business operates and what you want it to support, now and in the future.
Is a limited company right for your business?
If you’re setting up a limited company or reviewing whether your current structure still fits, early clarity makes decisions easier.
A limited company can provide a framework for running a business that makes it easier to make confident decisions about income, tax and long-term plans.
A short conversation with an accountant can confirm how a limited company works in practice, how money can be taken sustainably and how the structure supports both your business and personal plans.