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What are the pros and cons of a private limited company?

4 mins read
by Unbiased Team
Last updated Wednesday, June 12, 2024

Explore the pros and cons of private limited company registrations, including the time and costs, the potential advantages, and risks and caveats to be aware of.

Summary

  • Private limited companies are legally viewed as separate entities to their owners and shareholders.

  • Each shareholder in a private limited company has decision-making rights in proportion to how many shares they hold.

  • Private limited companies have many advantages, such as lower tax burdens, protected business names, and lower personal liability.

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What is a private limited company?

A private limited company is a legal entity separate from its owner. They have special legal status, with all profits, liabilities and assets belonging to the company, rather than its owners.

These companies are incorporated and registered with Companies House, and shares are issued to shareholders.

Unlike other types of registered companies, private limited companies are owned by their shareholders instead of a single individual who has sole decision-making rights.

Multiple shareholders each have voting rights proportionate to the number of shares they own.

If a single shareholder owns more than 25% of shares, they are considered ‘persons of significant interest’ due to their decision-making power in the business.

How long does it take to set up a private limited company?

You must register your private limited company with Companies House and register for Corporation Tax.

You must provide information about your company’s shareholders, including their towns of birth, mothers’ maiden names, fathers’ first names, telephone numbers, national insurance numbers, and passport numbers. 

The private limited company will typically be registered within 24 hours of application. Postal applications using form IN01 can take eight to 10 business days.

How much does it cost to set up a private limited company?

Registration of a private limited company costs £50, which can be paid by debit or credit card. Postal applications cost £71, and cheques can be paid to Companies House.

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What are some examples of private limited companies?

Well-known examples of private limited companies include tech giants such as Microsoft, Facebook, Apple, and Google.

These companies are classified as private limited companies as their shareholders hold decision-making rights within them.

What are the advantages of a private limited company?

Private limited companies carry a range of advantages, including:

Lower taxes

Limited companies pay Corporation Tax rather than sole trader income tax and national insurance on business profits. Corporation Tax is based on income minus business expenses and is lower than equivalent income tax rates for smaller firms, Companies can also claim a broader range of allowed business expenses to reduce their tax bill. 

Protected business name

Business names registered with the Companies House are protected and cannot be used by other businesses. Registrants must ensure their business names are available, as the Companies House may refuse to grant permission if your name is similar or identical to another registered business.

Less personal liability

Sole traders are personally liable for all debts and liabilities of their businesses. Private limited companies, on the other hand, only hold you and your shareholders liable for debts up to the value of the shares you hold, reducing personal liability risk.

Credibility

A private limited company is often perceived to be more credible and legitimate than a business operated by a sole trader. Customers who place orders or secure contracts seek out reputable suppliers, as do investors. Due to their elevated status, private limited companies may attract funding and customers more easily.

No minimum capital

Private limited companies don’t require minimum capital for registration, and have access to various funds to support their growth, including crowdfunding, venture capital and bank loans. Investors view these companies as lower risk, which benefits shareholders by making it simpler to raise capital. Capital can also be raised through the sale of shares.

What are the disadvantages of a private limited company?

There are also a few disadvantages of private limited companies to be aware of, including:

Limited control of the company

Companies House business records can be inspected by investors, competitors, and third parties. This gives you limited control over your company and makes it challenging to keep turnover, ownership and business change information confidential.

High regulatory compliance

Private limited companies have high administrative burdens due to the need to maintain records of company activities, persons of significant business control, and financial records of all transactions at all times.

You must also comply with many rules, laws and regulations, file accounts, maintain strict business records, and pay Corporation Tax. This may require the assistance of a company secretary.

Limited transferability of shares

Private limited companies can sell and transfer shares to raise capital, but shares cannot be listed for public sale. This limits the transferability of sales and how quickly shares can be sold to secure capital.

Partaking in shared ownership

Shared ownership entitles shareholders to influence business-related decisions in accordance with the proportion of shares they hold. This spreads decision-making abilities across multiple parties, each of whom may have different and potentially conflicting opinions about how the organisation should operate.

Financial reporting

Your business must always maintain clear and concise financial records and file them with Companies House and HMRC at the end of each financial year. This will require preparing and submitting full sets of statutory accounts in alignment with good accounting practices, possibly requiring the assistance of a paid accountant to remain compliant.

Get expert financial advice

Private limited companies offer a range of advantages for business owners and shareholders.

However, it is important to note potential caveats such as higher administrative burdens and limited share transferability in order to successfully run your business.

Let Unbiased connect you with an expert financial adviser or an accountant who can help you navigate the process of establishing, registering and operating your private limited company to maximise your income and shareholder benefits.

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Author
Unbiased Team
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.