Choosing how to run a firm is among the first choices a new owner has to make. Would you like to operate as a sole trader? Is forming a private limited company a better option? Sole traders, partnerships, and limited companies are among the available alternatives. But since each has its advantages and disadvantages, none is “perfect.” Private limited companies stand out among these as a highly attractive option for driven business people seeking to significantly impact the corporate world.
What is a Private Limited Company?
A private limited company is defined as “any type of business entity in ‘private’ ownership used in many jurisdictions, with some differences from country to country, in contrast to a publicly listed company.” Companies House registration is required for private limited companies.
Private limited corporations are one of the three business structures used in the UK, along with partnerships and sole proprietorships. A private limited company is a legal structure that denotes the creation of a business by an individual distinct from them. This suggests that the owner of the business and any other participants’ financial obligation will always be, at most, the total number of shares they possess in the company.
The finances of a private limited company are maintained apart from those of the individual. Therefore, if the business incurs debt, the company must pay it off rather than the owner or shareholders. The private limited business and its owners are considered independent entities under the law.ย
What Are the Minimum Requirements for a Private Limited Company?
To start a private limited corporation, a few essential requirements must be met.
Registered Office Address
It will be legally necessary for your company to have a primary registered address or office. Everything from the government is sent to this address; it needs to be secure and easily accessible. Your registered office address is subject to specific regulations that must be adhered to. The address must be in the region (England, Wales, Scotland, and Northern Ireland) where your job is conducted. Although it can be modified later, this address must remain in the same jurisdiction. This address can’t be a DX number or a P.O. Box; it has to be a real location.
Company Name
You must select the name under which your company will be incorporated. Companies House provides guidelines regarding the selection of a business name.
- You need your name to be distinctive.ย
- The name can’t be interpreted as rude or imprudent.
- The name must not imply associating with a public figure or institution.
- If the appropriate authority hasn’t permitted you, the name cannot contain any prohibited words.
Director
For a private limited company to be formed, you must have at least one director. A director is tasked with making decisions on the company’s behalf and ensuring that all deadlines and legal criteria are fulfilled. A corporation director needs to be:
- More than 16 years old
- Not listed as insolvent
- Both inside your disqualification period and not restricted from serving as a director
- Not the company’s auditor
- Anytime during the company’s existence, directors may be appointed or terminated.
Service Location
You must give a service address as a legal corporation if you are the director of a private limited company, shareholders, People with Significant Control (PSC), or members of an LLP. If Companies House or HMRC need to contact you about your involvement in the business, the address you supply will be the point of contact.
You cannot use a PO Box or a DX number when setting up your service address; instead, you must select a real address in the UK or abroad. You may provide only one address; however, it may be the same location you used for your registered office. But if necessary, the address can be modified at any moment. When selecting your service address, remember that, similar to your registered office location, this will be visible to everyone on the public register. So, it is not a good idea to use your home address.
Members
The individual who owns the firm is a member. For your business, you need to have at least one member. Depending on the kind of business you’ve selected, they are either a shareholder or a “guarantor.” The primary goal of private limited firms, which their shareholders often hold, is to boost revenue and distribute any surplus earnings to them after corporation tax has been settled. On the other hand, a business limited by guarantee has members who “guarantee” to reinvest in the company if financial difficulties arise.
Who Can Gain from Running a Private Limited Business?
There is a wide range of benefits and disadvantages of a private limited company. Selecting a business model at this point is sometimes a compromise exercise: which benefits are most important to you? And how do they compare with the disadvantages?ย
However, many determine that the benefits of private limited companies greatly exceed the drawbacks. This is the case in the United Kingdom, where 4.5 million firms are private limited companies. This makes running a business as a private limited company the second most common business structure in the UK.ย
This business model is widely used by businesses of all sizes, including restaurants, law firms, and plumbers, as well as by companies in all industries. However, The advantages and disadvantages of a private limited company should be thoroughly considered before employing this business model. You alone have the authority to determine whether the benefits can offset the disadvantages of being a private limited company.
| Advantages of Private Limited Company | Disadvantages of Private Limited Company |
| Reduced Personal Liability | Higher Costs |
| Professional Status | Accounting Requirements |
| Lower Tax and Planning | Company Secretary |
| Higher Personal Remuneration | Limited Companies Must Be Incorporated At Companies House |
| Separate Legal Identity | Privacy and Public Record |
| Credibility and Trust | Accountant Costs |
| Investment and Lending Opportunities | Changes to the Company |
| Protecting a Company Name | Administrative Burden |
| Splitting Income | Self Assessment |
| Pensions | Limited Control and Decision Making |
10 Advantages of a Private Limited Company
Private limited companies have several key advantages when compared to other business structures. The most notable benefits are:
1. Reduced Personal Liability
Private limited companies have limited liability, which means that the company and its shareholders are only liable for debts up to the value of their shares. This is not the case with a sole trader, who is personally responsible for all obligations and liabilities of the business.ย
2. Professional Status
Private limited companies are seen as professional businesses, which gives them a certain level of credibility and trust. This can be important when dealing with customers or suppliers.
3. Lower Tax and Planning
Private limited companies can access tax planning opportunities that sole traders do not. These include dividend payments, capital allowances, and corporation tax. Locums, Contractors or Medical Professionals sometimes use a Limited Company structure if outside IR-35, as it is more tax efficient. A good Medical Accountant can advise on further tax savings you can achieve through your LTD. as a contractor.
4. Higher Personal Remuneration
Private limited company shareholders can use several tax-efficient ways to pay themselves, such as through dividends or tax-planned payroll. This can result in a higher personal income than if they were self-employed.
5. Separate Legal Identity
Private limited companies have a separate legal identity from their shareholders. This means that the company can own property, enter into contracts, and sue or be sued in its name.
6. Credibility And Trust
Private limited companies are seen as more credible and trustworthy than other business structures. This can be important when trying to win new customers or attract investment.
7. Investment And Lending Opportunities
Private limited companies can access funding opportunities that other business structures do not. This includes crowdfunding, venture capital, and even going public on the stock market. Limited companies are also more likely to be able to borrow money from banks due to their limited liability status.
8. Protecting A Company Name
Private limited companies can protect their name by registering it as a trademark. This gives them exclusive rights to use that name concerning the products or services they offer.
9. Pensions
Private limited company shareholders can take advantage of pension schemes not available to self-employed people. This can provide a valuable retirement income in later life.
10. Splitting Income
Private limited company shareholders can split their income between salary and dividends to reduce the overall tax bill of both them and their business. This is only possible for some traders, who must pay all profits as self-employment income tax. Make sure you look at the overall picture before deciding how to extract income from your limited company. Speaking to your Personal Tax Accountant at the beginning of the tax year can help you plan efficiently.
10 Disadvantages of a Private Limited Company
Private limited companies have a number of key disadvantages when compared to other business structures. The most notable private limited company disadvantages are:
1. Higher Costs
Private limited companies have higher costs than other business structures due to the need to comply with company law and file accounts at Companies House. This can include accountant fees, company formation costs, and annual compliance costs.ย
2. Accounting Requirements
Private limited companies must keep detailed accounting records, which must be filed with Companies House. This can be time-consuming and complex, particularly for smaller businesses.ย
3. Company Secretary
Private limited companies are required to appoint a company secretary within one month of incorporation. This is a role that a qualified individual must carry out, and the company’s directors cannot carry it out.
4. Limited Companies Must Be Incorporated At Companies House
One disadvantage of a private limited company is that you have to register with Companies House. Limited companies are subject to a range of statutory requirements, including the need to file detailed accounts at Companies House each year. This can be time-consuming and expensive for smaller businesses. Limited companies must also submit an annual confirmation statement (form CS01) to Companies House every year, which confirms that details held on public record are up to date.
5. Privacy And Public Record
Limited companies have limited privacy when compared to other business structures. Limited company accountants and details of the companyโs directors, shareholders, and registered office address are all on public record with Companies House.ย
6. Accountant Costs
Private limited companies must abide by strict accounting requirements, so they often rely heavily on accountants to manage their compliance responsibilities. This can be costly for small businesses if they hire incompetent accountants. Limited companies must file annual accounts at Companies House, a time-consuming and complex process many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.ย
7. Changes To The Company
Private limited companies are subject to strict rules about changing their name, structure or share capital. This can be difficult and expensive for businesses that want to make changes.ย
8. Administrative Burden
The term “administrative burden” describes the copious amounts of documentation, record-keeping, and compliance obligations that accompany running this kind of organisational structure. These businesses are required to maintain thorough records of every aspect of their operations, such as regular financial reporting, tax filings, shareholder records, meeting minutes, and notes on any decisions taken by top staff members or directors. There may be legal implications if certain administrative obligations are not met.
Registration and continuing compliance procedures can be laborious and burdensome administratively, particularly for small enterprises or startups with little funding. To make sure that the requirements are followed, it could be necessary to hire experts like company secretaries or limited company accountants.
9. Self-Assessment
Limited company directors are responsible for filing an annual self-assessment tax return. Limited company shareholders can choose to operate their business as sole traders, which allows them to avoid the need for self-assessment.
Limited companies must file annual accounts at Companies House, a time-consuming and complex process that many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.
Limited companies are subject to strict rules about changing their name, structure, or share capital. This can be difficult and expensive for businesses that want to make changes. Limited company shareholders have limited liability when it comes to the debts and liabilities of the company.
10. Limited Control and Decision Making
You can transfer ownership among shareholders to generate funds, which is one benefit of forming a private limited company. However, the more of the company you divest, the less decision-making power you keep. Shareholders’ decision-making authority will be distributed based on their respective stakes, resulting in shared authority.ย
On the one hand, this frequently encourages different viewpoints and results in creative, fresh solutions for your company. However, trying to balance the interests and viewpoints of several parties can lead to disputes, confrontations, and difficulties in coming to conclusions quickly. Because all shareholders must be satisfied, thorough negotiation and compromise may make the process time-consuming. Thus, it’s wise to be sure the individuals you sell your shares to will get along well with one another!
Sole Trader Vs Private Limited Company
Liability is the primary distinction between a sole trader and a limited corporation.
A sole trader will be entirely responsible for the debts, losses, and legal claims of the company.
The owner of a limited corporation, on the other hand, has limited liability and is not subject to any of that. There are numerous benefits and drawbacks to the company formation being viewed as distinct from the owner.
When it comes time to file your taxes, these benefits may assist in easing some of your financial burden and provide you with a bigger refund.
Better tax benefits, including corporation tax, are another benefit that limited corporations enjoy.
Remember that a limited corporation has standing that an individual trader does not. By itself, this can bring in business and enable you to sign contracts you couldn’t as a sole trader.
A limited corporation does have some drawbacks, so it could be better. A tiny business might need more time to register with Companies House, in addition to the requirement to pay for the right to do so.
A limited company’s bookkeeping and bank account management will be more complicated than that of a lone proprietor.
The fact that establishing a sole trader is free and requires little ongoing management could be crucial for company owners. Therefore, it’s something to think about. Money is just time.
A sole trader is the ideal business form for independent contractors or small businesses because the tax ramifications should be manageable at this point.
Advantages and Disadvantages of Sole Trader Business
For many small business owners, especially freelancers with few clients and annual incomes under ยฃ30,000, the sole trader structure is the best option.
Nonetheless, there can be a moment when limited company formation makes sense both financially and professionally. An accountant should be your first choice if you get to that point because they can advise on the best course of action.
| Advantages of Sole Trader | Disadvantages of Sole Trader |
| Online setup is quick and simple, and Companies House registration is not necessary. | Limitless personal liability for obligations and legal actions |
| No requirement to pay HMRC a registration fee | More difficult to obtain loans and raise funds |
| In general, initial expenditures and expenses are low | Only one individual may set it up and own it. |
| Profits can easily be removed for personal use. | Obligatory income tax payments ranging from 20 to 45% |
| Minimal expenses and criteria for accounting | You are in charge of paying your own taxes and NICs. |
| All business profits and assets will be yours. | Sole traders are often rejected by businesses. |
| No requirement to keep a service address or registered office | Pension plans offer lower tax efficiency. |
| No need to make accounts or personal information public | Not qualified for Statutory Maternity Benefits |
| No need for corporate records to be made available for review by the public | Sole traders’ professional standing is not as highly recognized as that of limited companies. |
| Minimal requirements for documentation and record-keeping | No ability to reinvest extra money without paying taxes or postpone withdrawals until a later tax year |
| Less limitations when deciding on a company name | It is not possible to give tax-free dividends on profits to a spouse or family member |
Final Thoughts
The pros and cons of a private limited company will ultimately rely on your firm and its objectives. It might be wiser for some smaller businesses to wait to apply for incorporation until after the business has grown. Nevertheless, forming a limited company could have a revolutionary effect if you feel that running your firm as a sole proprietor is holding you back and you wish to expand its reach.
There are several advantages and disadvantages to forming a limited company, both for your enterprise and for you as an owner. By reducing your responsibility, you can essentially provide yourself with a “legal shield” that will allow you to trade with confidence. Similarly, having a registered company will open up new business opportunities for you that were previously unattainable. Ultimately, you will have additional options to manage your funds, enabling you to make wise decisions that may result in cost savings
Additional Resources
- Protecting Your Small Business From Risks
- Impact of Cash Flow Forecasting on Growth
- Benefits of Cloud Accounting for Small Businesses
- How to Close a Limited Company in the UK?
- Does IR35 Apply to Limited Companies? The Ultimate Guide
- How to Start a Limited Liability Company?
- A Comprehensive Guide on Running a Limited Company
FAQs
Is It Possible for a Private Limited Company to Utilise a Virtual Office?
Yes, a Private Limited Company can use a virtual office. Without the requirement for actual office space, businesses can have a prominent address, phone services, and administrative help by utilising virtual offices. For startups and small enterprises seeking to maintain a low cost of operation while establishing a professional presence, this arrangement is particularly advantageous.
What Constitutes the Organisational Framework of a Private Limited Company?
Typically, a Private limited company’s organisational structure is made up of a board of directors, a company secretary, and shareholders. The firm is owned by its shareholders; directors oversee daily operations, and a company secretary ensures all legal and regulatory obligations are met. In addition, the Memorandum and Articles of Association of Private Limited Companies specify the goals, regulations, and organisational framework of the company.
How Does the Management of a Private Limited Company Work?
A Private Limited Company’s board of directors is in charge of overseeing its management. The shareholders nominate directors, who are in charge of managing the company’s operations, making important business decisions, and making sure the company complies with legal requirements. To decide on a strategy, the board of directors usually meets regularly, and these sessions are recorded.
What Are the Eligibility Requirements for Establishing a Private Limited Company?
A Private Limited Company requires a minimum of two directors and two shareholders to be established. Directors must be individuals. However, shareholders may be either individuals or corporate entities. Regarding residency or nationality, there are no special criteria for the directors or shareholders. The company’s registered office address must be in the nation where the company is registered, and the company secretary must also be chosen. In addition, the firm needs to have a minimum approved and issued capital following local regulatory standards, which can differ depending on the jurisdiction. To ensure that you are under any local restrictions, it is advisable to speak with legal or business professionals.
