A limited company is a separate legal entity from its owner. That single fact drives most of the reasons people use one.

The most common reasons are:

• Limited liability. If the business fails, your personal assets, your home, savings, car, are generally protected. As a sole trader they are not.
• Tax efficiency. A limited company pays Corporation Tax on its profits, currently at lower rates than higher-rate Income Tax. Directors can also combine a small salary with dividends, which can reduce their overall tax burden compared to being self-employed.
• Some clients, particularly larger businesses and public sector organisations, prefer or require their suppliers to be incorporated.
• Access to finance. Banks and investors often prefer lending to or investing in limited companies rather than sole traders.
• Pension contributions. Companies can make employer pension contributions as a tax-deductible expense, which is more efficient than personal contributions for higher earners.

Not every business needs to be a limited company. But for many directors, the combination of liability protection and tax planning opportunity makes incorporation worthwhile once profits reach a meaningful level.

This depends on your circumstances, and it is a question worth revisiting rather than assuming the answer.

Incorporation is likely to have been the right decision if:

• Your profits are consistently above approximately £30,000 to £35,000 per year.
• You operate in an industry where clients expect or require it.
• You wanted to protect your personal assets from business risk.
• You are building a business with employees, contracts and long-term value.

Incorporation may be less clear-cut if:

• Your profits are modest and the administrative burden of running a company outweighs the tax saving.
• You are in the early stages and generating little or no profit.
• Your trading is straightforward and self-employment would serve you just as well.

If you are not sure whether incorporation is working in your favour, speak to your accountant and ask them to model both structures. The answer may surprise you in either direction.

Beyond the reasons for incorporation, the ongoing benefits of running a limited company include:

• Tax planning flexibility. You can control when and how you take income, which allows for year-on-year tax planning.
• Legal separation. Contracts, debts and obligations sit with the company, not with you personally.
• A company can be sold, transferred or passed on in ways that a sole trader business generally cannot.
• Pension efficiency. Company pension contributions reduce Corporation Tax.
• Investment and funding. A company can issue shares and raise investment in a way that a sole trader cannot.
• Business continuity. The company continues to exist regardless of changes in ownership or management.

Being a director carries legal obligations that many people do not fully appreciate when they first incorporate. The main duties under the Companies Act 2006 are:

• Act within your powers as set out in the company’s articles of association.
• Promote the success of the company for the benefit of its members.
• Exercise independent judgement.
• Exercise reasonable care, skill and diligence.
• Avoid conflicts of interest.
• Not accept benefits from third parties.
• Declare any interest in a proposed transaction.

In practical terms this means filing accounts and confirmation statements on time, keeping proper records, paying tax when it falls due, and not allowing the company to trade while insolvent.

Directors can be held personally liable if they breach these duties. It is not a role to be taken lightly.

There are several ways to extract money from a limited company, each with different tax consequences:

• Paid through PAYE. Subject to Income Tax and National Insurance for both the employee and the employer. A tax-deductible expense for the company.
• Paid from after-tax profits. Subject to Dividend Tax rather than Income Tax, at lower rates. Not subject to National Insurance. Not a deductible expense for the company.
• Director’s pension contributions. The company pays into your pension. A tax-deductible expense. No Income Tax or National Insurance on the contribution.
• Director’s loan. You lend money to the company or the company lends money to you. Subject to specific rules and tax charges if not repaid within nine months of the year end.
• Legitimate business expenses can be reimbursed by the company without a tax charge.

Most directors use a combination of a low salary and dividends to minimise their overall tax position. The right structure depends on your personal circumstances and should be reviewed with your accountant annually.

This is one of the most important questions for any director.

Salary is employment income. It is processed through PAYE, subject to Income Tax and National Insurance, and it is a tax-deductible expense for the company. You get a guaranteed payment regardless of whether the company is profitable.

Dividends are a share of the company’s profits. They can only be paid when the company has sufficient retained profits. They are subject to Dividend Tax, which is lower than Income Tax, and are not subject to National Insurance. They are not a deductible expense for the company.

In practice, many directors pay themselves a salary just above the National Insurance threshold (to preserve state pension entitlement) and take the remainder as dividends. This is often the most tax-efficient approach, but it must be structured correctly and reviewed each year as rates and thresholds change.

Yes. A private limited company can have as many directors as the shareholders choose to appoint. There is no legal maximum.

Having more than one director can be beneficial for several reasons:

• It distributes responsibility and decision-making.
• It allows the company to continue operating if one director is unavailable.
• It can enable additional salary and dividend planning if a spouse or business partner is involved.

However, all directors carry the same legal obligations and liabilities. Appointing a director is not simply an administrative arrangement. Each director must be willing to accept the duties and responsibilities the role carries.

There are several ways to close a limited company, and the right approach depends on whether the company is solvent.

If the company is solvent:

• Voluntary strike-off (also called dissolution). You apply to Companies House to have the company removed from the register. This is suitable for dormant companies or companies that have ceased trading and have no significant assets or liabilities.
• Members’ Voluntary Liquidation (MVL). A formal process used where the company has significant assets to distribute. It can be highly tax-efficient as distributions are treated as capital rather than income, and Business Asset Disposal Relief may apply.

If the company is insolvent:

• Creditors’ Voluntary Liquidation (CVL). The directors and shareholders agree to wind up the company when it cannot pay its debts.
• Compulsory liquidation. A court order forces the company into liquidation, usually following a creditor’s petition.

Closing a company incorrectly, for example, simply abandoning it while it still has obligations, can lead to personal liability for the directors. Take professional advice before taking any action.

The law requires a company to maintain certain records. As a director you are responsible for ensuring they are kept.

Statutory records:

• Register of members (shareholders)
• Register of directors
• Register of persons with significant control (PSC register)
• Minutes of board meetings
• Copies of resolutions

Accounting records:

• All money received and spent by the company
• Details of assets and liabilities
• Stock records where the business holds stock
• Statements of stocktakings
• All goods bought and sold (with details of buyer and seller where relevant)

HMRC requires accounting records to be kept for at least six years from the end of the accounting period to which they relate. Companies House statutory records should be kept indefinitely.

Yes. A single limited company can carry on more than one type of business activity. There is no legal restriction preventing this.

However, there are practical considerations:

• Management accounts. Mixing activities makes it harder to track the performance of each individually.
• If one activity creates a liability, it could affect the whole company and all its activities.
• VAT and tax. Different activities may have different VAT treatments, which can create complexity.
• Banking and finance. Lenders may find it harder to assess a business that mixes unrelated activities.

For larger or more complex operations, directors sometimes choose to incorporate each business activity separately or to hold them under a holding company structure. Whether that makes sense depends on the nature and scale of the activities involved.