Private Limited Companies - The Advantages and Disadvantages

If you are starting or expanding a small business, you can choose between operating as a sole trader or a private limited company, also known simply as a limited company. Many property investors and other entrepreneurs choose to form a private limited company to enjoy the benefits that come with this status, but there are also some drawbacks that you should be aware of. Read on to find out what a private limited company is, how to form one, and the advantages and disadvantages of private limited companies.

Table of Contents

What is a Private Limited Company?
Who can set up a Private Limited Company?
How to Form a Private Limited Company
Advantages of a Private Limited Company
Disadvantages of a Private Limited Company

What is a Private Limited Company?

A private limited company is a legal entity that can do business and enter into contracts in its own name separate from the person or people who own it. The company’s finances are separate from its owners, thus the owners’ personal assets cannot be seized to settle company debts. The ‘limited’ part of the name refers to the term ‘limited by shares’, meaning it has been set up with the international to make a profit and has shareholders. A shareholder is someone who owns part or all of the company. Unlike a Public Liability Company or PLC, private limited companies’ shares are not publicly traded. A single person can own and operate a limited company as the director and only shareholder. Businesses that are private limited companies can be found on the Companies House website and will show the suffix ‘Ltd’ after their name on official documents.

Who can set up a Private Limited Company?

Just about anyone can set up a private limited company by themselves. The only stipulations are that you are over 16, not registered as bankrupt, not an auditor of the business, and have not been disqualified as a company director and still within the terms of the disqualification. Anyone who meets these requirements can set up a limited company and appoint other people who qualify as directors of the company.

How to Form a Private Limited Company

Setting up a private limited company is a fairly easy process that can be done online for just £50. You form or ‘incorporate’ a private limited company by registering with Companies House. You just need to provide a registered business address and email address, choose a unique business name (see guidance on this here), and list the company directors, which can just be you. You also need to check what kind of records you must keep and create some company documents such as a memorandum of association (this is created for you when you register online if you are the only director) and articles of association, which are rules on how the company will be run as agreed by the shareholders. Again, this is pretty straightforward if you are the only shareholder. There are companies that can do this for you, but it’s simple to do yourself.

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Advantages of a Private Limited Company

Here are some of the benefits of a private limited company:

Limited personal liability

As the director of a private limited company, you are not personally liable for any debts incurred by the company, as the company is considered a separate entity from yourself. Shareholders are only liable for any debts up to the value of their share in the company. Whereas if you are a sole trader and your company gets into debt, you can be held personally accountable, and your personal assets could be seized to pay off company debts.

Tax benefits

This is one of the main benefits of private limited companies along with limited personal liability. Limited companies pay corporation tax, which is set at between 19% and 25%, this is much lower than the higher income tax brackets of 40% and 45%. Company directors still have to pay income tax and National Insurance contributions, but there are several ways to take money from the business in the form of salaries and dividends, meaning you will personally pay less tax. Dividends are not subject to income tax or NI, and while you still pay tax on dividends, it is at a much lower rate.

Looks professional

Operating as a limited company can offer your business some gravitas and credibility, making your company look much more professional than a sole trader. Anyone can look up your business and see it listed on Companies House, making it easy for potential lenders, new investors or customers to check the authenticity of the company.

Protected business name

Registering your business under your chosen company name on Companies House means that no one else in the UK can have a limited company with the same name or even a very similar name.

Flexibility of personal income

You take money from a private limited company as either a salary or dividends. Dividends are taxed at a lower rate than salaries, which will reduce your personal tax bill. You can also take pension contributions (also untaxed below a certain amount) and bonuses from the company each year.

Disadvantages of a Private Limited Company

Here are some drawbacks of a private limited company:

More complicated than being a sole trader

Sole traders only need to register as self-employed on the HMRC website, which is free and very simple. Forming a limited company does take more steps and incurs a setup fee.

Lots of paperwork

Owning a private limited company comes with added responsibility usually in the form of masses of paperwork. From the setup process to various forms, financial and business admin work throughout the year, this will take up a significant portion of your time. You can hire someone to do this for you but this will cut into your profits.

Higher interest rates

Buying property as a limited company does incur higher interest rates, especially if you are looking for a buy-to-let mortgage. Mortgage lenders will also demand a higher LTV (loan to value) ratio meaning you may have to come up with 25 – 40% of a property’s value to get a mortgage.

Publicly available records

Having the records of your business available online for all to see can be a drawback. Not only are your personal details listed, but any ownership changes, yearly turnover, and other information is there too, which you may not wish your competitors to see.

Financial reports

So any business owner has to do taxes, but they are more complicated for a limited company than a simple self-assessment as done by sole traders. You also need to keep and maintain all financial records and keep them for at least 6 years, and submit your accounts to Companies House, where they will be publicly available.

As you can see, there are many significant benefits and drawbacks to having a private limited company. It is up to you to determine whether a private limited company is the right choice for you depending on your personal and financial situation and your investment goals. You can always start as a sole trader and then incorporate later on as your business grows.

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