If you’re considering setting up a business, it’s essential to understand the different types of business structures available to you.
One of the most common types in the UK is the private limited company. This article will guide you through what a private limited company is, how it operates, and the benefits it can offer.
Defining a Private Limited Company
A private limited company is a type of business structure that is privately owned either by its founders or a group of private investors. This type of company is prevalent in the UK, ranging from single-person operations to large corporations with multi-million-pound turnovers.
The ‘Private’ Aspect of a Private Limited Company
When we say a company is ‘private’, it means that the company is owned privately by its founders or a group of private investors. Unlike public companies, shareholders of a private company must be invited by the company to purchase shares.
Public companies have the ability to sell either a portion or all of itself to the public. However, they also have increased reporting and statutory requirements. For instance, they must have a minimum issued share capital of £50,000, with at least one-quarter of that being paid up in full. On the other hand, private limited companies have no such minimum capital requirements, making them a more flexible option for many business owners.
The ‘Limited’ Aspect of a Private Limited Company
The term ‘limited’ in a private limited company refers to the liability of the shareholders. When you set up your company, you will decide how many shares each shareholder will have and the nominal value of each of these shares.
The shareholders are then only liable up to the total nominal value of these shares. For instance, if a company owned by one person decides to hold one share of £1, their liability is kept low at £1.
This is in stark contrast to a sole trader, who would have unlimited liability and could be pursued directly by creditors for business debts. A limited company, on the other hand, is considered its own legal entity that is separate from its owners. This means that the company can enter into contracts and is held accountable for its liabilities, not the individual owners.
Types of Private Limited Companies
Private limited companies can be categorised as either limited by shares or limited by guarantee.
Both structures provide the owners with limited liability, which is a key advantage of private limited companies.
Limited by Shares
These companies are typically for-profit ventures. The shareholders have a liability that is limited to the nominal value of their shares. This means that if the company incurs debts, the shareholders are only liable up to the value of their shares.
Limited by Guarantee
These companies are usually for non-profit ventures. The members of these companies guarantee a certain amount to cover the company’s debts if it is wound up.
Advantages of a Private Limited Company
Choosing to operate as a private limited company comes with a host of benefits. Here are some of the key advantages:
Ease of Setup: The process of forming a private limited company is straightforward and quick. In many cases, companies can be formed in as little as three hours.
Limited Liability: One of the main attractions of a private limited company is the limited liability conferred upon the company’s shareholders. In other words, personal assets are not at risk if the company runs into financial trouble.
Professional Image: Operating as a private limited company can enhance your business’s image. This can make your business appear more credible and trustworthy to clients, customers, and investors.
Succession: Unlike sole traders or partnerships, private limited companies can continue indefinitely, regardless of changes in membership.
Protection of Company Name: Once you register your company name, it is protected and cannot be used by other businesses.
Access to Funding: Private limited companies can issue shares to raise capital, making it easier to attract investors.
Tax Efficiency: Private limited companies pay corporation tax on their profits, which is typically lower than the income tax rates paid by sole traders.
Who Can Set Up a Private Limited Company?
Anyone can set up a private limited company, provided they are not disqualified from doing so (for example, due to being an undischarged bankrupt). The owners of private limited companies are known as shareholders. You can set up a limited company by yourself, owning 100% of the shares, or with others, dividing the available shares among the shareholders.
How Many People Do You Need to Form a Limited Company?
What is a private limited company?
Running a Private Limited Company
Directors, also known as company officers, manage limited companies. A private limited company must have at least one director. Most company owners are directors, meaning you can own and manage a limited company yourself or with others.
Disadvantages of a Private Limited Company
While there are many benefits to setting up a private limited company, it’s also important to consider the potential downsides:
Legal Requirements
Private limited companies are subject to a range of legal requirements, such as filing annual accounts and returns with Companies House and delivering a corporation tax return to HMRC. Failure to meet these requirements can result in hefty fines.
Getting Paid
Unlike a sole trader who can take cash out of a business without restriction, removing money from a private limited company is more complicated. The business has to legally transfer money to you in the form of a salary or dividend payment. It may also be possible to temporarily borrow money from your company via a Directors Loan Account.
Setting Up and Closure
While setting up a private limited company is straightforward, it does involve registering with Companies House and informing HMRC, as well as paying annual fees. If you decide to close a limited company, you’ll have to apply to dissolve the business, which can take three months.
Financial Aspects of a Private Limited Company
A private limited company must register with HMRC and pay corporation tax on any profits it makes within its financial year. This is in addition to any income tax and National Insurance contributions (NICs) employees and directors must pay.
The company can also pay dividends to shareholders, which are subject to income tax, though exempt from NICs. Payments to employees must be made via PAYE, and the company must also pay NICs to HMRC as part of an employee’s salary.
Other Considerations
There are several other factors to consider when setting up a private limited company. These include pension arrangements for employees, borrowing from the company, and the requirement to prepare annual accounts.
A private limited company is a popular choice for many business owners due to its numerous benefits, including limited liability, tax efficiency, and a professional image. However, it’s important to consider the potential downsides and responsibilities that come with this type of business structure.
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