Learn all about private limited company.
What is a Private Limited Company?
A limited company is a business that's legally separate from its owners. With private limited companies, typically, the owners are shareholders, and together they appoint a director to run the business.
All private limited companies in the UK must be incorporated by Companies House, where they've given a unique company registration number. You can spot a limited company easily; they'll have Limited or Ltd. at the end of their company name.
A private limited company has a separate legal entity from the person who runs it, which means limited companies have the same rights and responsibilities as a person in the eye of the law. If you're considering becoming a private limited company, there's a lot of information you ought to know first.
In this article, you'll learn all about private limited companies, the difference between private and public limited companies, and the advantages and disadvantages of being a private limited company.
What is a Private Limited Company?
Since you’re here, you must know of private companies; you may have also encountered public limited companies. Although both are limited and incorporated by Companies House, there are apparent differences.
With a public limited company, shares are traded on the stock exchange. Well-known examples of public limited companies would be large corporations with chains like Cineworld Group Plcs or Rolls-Royce Holdings Plc. These companies have a national presence; anyone can buy and sell their shares.
If a business has Plc at the end of its name, it's a public limited company. Public companies are typically run differently from private companies. For example, a public limited company must have a minimum of two directors and a qualified company secretary. To qualify for a public limited company, a minimum share capital must be £50,000.
A private limited company doesn't publicly trade shares and has a maximum of 50 shareholders. Shareholders receive yearly dividends from any profits made by the company.
A private company tends to be local retailers like shops or restaurants that aren’t elsewhere. Most private limited companies are small businesses. The company must have at least one share to qualify as a private limited company. There is no minimum capital requirement to become a private limited company.
What is the Role of a Shareholder in a Private Limited Company
With a private limited company, business owners can invite shareholders to invest in shares in their company. However, there can't be any public sales of shares.
However, there can't be any public sales of shares. Shareholders who have bought a percentage of the business own a legal stake. Shareholders collectively vote for a director or someone who runs the company; a shareholder can become a company director if others agree.
If the business fails or accrues debt, shareholders are legally limited to liability; this means they'll never owe or pay anything above their original share. Shareholders are paid from annual profits only after the limited company has paid annual Corporation Tax. Once there's been a tax deduction, shareholders can divide the profits between themselves.
What are Private Companies Limited by Guarantee?
You may or may not know this already. Still, there are two types of private limited companies, the one we’ve previously described and that this article is about and another: a private company limited by guarantee (CLG). Although this type of organisation differs from an everyday business, you must know what a CLG entails if you encounter one.
A CLG is a type of private limited company run by non-profit organisations. These private companies don't have any shareholders but are owned by guarantors who contribute a set amount of money towards company debts.
So these companies are typically sports and social clubs, trade associations and charitable organisations. Like private limited companies, members get invited, and owners of guarantee companies benefit from limited financial liability.
However, profits generated don't get distributed between its owners. Instead, profits are reinvested into the enterprise to grow further.
Private Limited Company Advantages
You'll be happy to know that there are more advantages to operating a private limited company than disadvantages.
The effect is primarily positive, but it's essential to explore both advantages and disadvantages to ensure making a private company limited is the best way forward for you and your business.
Limited Personal Liability
If you're a sole trader, you are personally liable for all debts and liabilities within your business. In a private limited company, should the company fail, company owners are not legally obligated to pay outstanding company debts beyond their shares.
Responsibility will fall onto all shareholders, but they will only have to use their shares to pay debts. So shareholders' personal assets won't be seized if things go wrong, and there will be limited personal liability.
Raise Capital and Increase Business Growth
Most large businesses choose not to work with companies or sole traders that aren’t incorporated. You can provide goods and services to more companies by operating as a limited company, as your business may be seen as more promising than one that isn’t incorporated.
Due to the transparent nature of private limited companies being added to the public register when registering with Companies House, a limited company is typically seen as a more professional operation than unincorporated businesses or sole traders.
Investors and people wanting to work with a limited company can access the company's filing history, annual return and any potential debts incurred. Investors also tend to favour private limited companies, so there's potential to make attracting funding easier.
You can also increase capital by selling shares in your limited company to help grow your business, but you can't offer them for public sale. So, you’d have to invite someone to purchase a share. Private limited companies also have access to a broader range of funds for growth, such as venture capital schemes, bank loans, and crowdfunding.
A private limited company pays Corporation Tax based on income minus allowable business expenditure. Corporation Tax is a business tax that limited companies pay once a year, and it's based on annual profits. A private company pays Corporation Tax in addition to income tax and National Insurance Contributions paid by employees and directors.
If you're a smaller business, Corporation Tax rates are lower than the equivalent income tax rates. Private limited companies can claim a broader range of allowable expenditures, lowering the company's tax bill.
As the director of a private limited company, you'll still have to pay personal income tax and make National Insurance Contributions. Still, you'll have greater flexibility in paying yourself a wage, which means you can save on your personal tax bill.
Protected Business Name
When you use Companies House to register your business, your name becomes protected, and any other company can't use it. Companies House can refuse permission if a different business tries to use your name.
Companies House may also deny similar names to other business names, and this is to prevent other companies from copying products and trying to pass off their products as part of your business.
As a private limited company is its own legal entity, if the company is sued, the potential harm will fall onto the business’s name and not the shareholders. Equally, the business will have the ability to sue.
Personal Income Flexibility
As the director of a limited private company, you can choose how you pay yourself. You could pay yourself a combination of salary and dividends. Dividends are taxed at a lower rate than salary, so this will reduce your tax bill overall.
As the director of a business, you can choose to take money out of the business in other ways, such as bound payments, pension contributions, director's loans and private investments.
Company Pension Provision
In a private limited company, they may have the opportunity to participate in a company pension scheme on top of a private personal pension scheme. With private limited companies, employee pensions can be more generous regarding benefits and limits. Pension plans are typically better for directors and employees within limited businesses.
Private Limited Company Disadvantages
Running a business is challenging, to begin with, and deciding to become a private limited may come with some added pressures.
There are only a few disadvantages to making your business into a private limited company.
Legal Requirements and Financial Reporting
When you run a private limited company, you must be prepared to maintain many records for legal requirements. Additionally, your business needs to comply with relevant laws and regulations and maintain accurate business records. You have to file accounts and pay Corporation Tax.
You'll need to keep a record of the following information:
- Company activities: voting decisions, shareholders, list of directors any other essential things that go on within the business.
- Financial records: you need a record of all transactions within and concerning the business. You should include records of business assets, all profits, and completing annual accounts of all financial on-goings.
- Employees: any person who is essential to the business and has significant control within the company must be recorded at all times.
You must maintain accurate financial records and file them correctly with both HMRC and Companies House following the end of the financial year. So, you'll have to prepare and submit a full set of statutory accounts following recognised accounting practice.
Setting Up Costs
Setting up a private limited company is generally more time-consuming and costly. Registering your business with Companies House is not expensive, but the process to get to the registration can be. You can expect to pay between £12 and £100 for the initial registration of a limited company.
There is a lot that goes into the process of starting a limited company:
- Decide on who to run the business: you must appoint a director, which has to be voted on and agreed on by all shareholders.
- Nominate shareholders: you can’t sell shares publicly, so you have to find shareholders interested in your business venture.
- Prepare legally required documents: many legal documents are involved with starting a private limited company, including a Memorandum of Association and Articles of Association.
- Select and register a business name: there is potential for another business to exist with your desired name. Be ready with different ideas. You could also go out of your way to trademark the name or words associated with your business if you want added security.
There is much to do to register a private limited company, whereas a sole trader must only register with HMRC for income tax purposes.
Depending on the arrangements made with your shareholders, any profit made with a limited company is distributed to shareholders or put back into the company. In contrast, a sole trader would have complete control of the profits.
Depending on how much profit you make and how many shareholders (up to 50), there may not be a lot of profit left to return to the business.
However, shareholders want their investment in the business to grow, so it’s likely that some will put their investment back into the business to ensure even more profits for the next financial year.
Although we've shared a plethora of information and you now know what a private limited company is, we recommend seeking professional advice. Business structuring can be complex and should be backed with strong financial principles.
So, private limited companies can be advantageous. Although expensive and time-consuming, you can enjoy limited liability while driving your business structure to success. Starting a business can be daunting, but knowing there's protection for you if it fails can take some of that burden off your shoulders.
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