Thinking about setting up a business? Here are the key advantages and disadvantages of setting up a private limited company.
Okay, so you’ve got a fantastic idea, the perfect target audience, and you’re all ready to set up your business. The next thing you need to do is decide what kind of company structure best suits your business. Choosing a company structure is a crucial decision that can impact various aspects of your business, including liability, taxes, management, and funding, so it’s important to take your time when making a decision.
So how do you choose? There are pros and cons to each structure, and it’s all about identifying which one will help your company thrive. This blog post sets out the advantages and disadvantages of setting up a private limited company, which is the most common form of UK company incorporation.. It’s typically a for-profit business entity, designed for commercial activities that will generate a profit for its owners or shareholders.
Here’s what you need to know about setting up a private limited company – the advantages, disadvantages and why it might be the best choice for you.
WHAT IS A PRIVATE LIMITED COMPANY?
So what’s a private limited company? A private limited company is formally set up and registered with Companies House, and it’s set up to pay shares to its shareholders. It’s a legal entity in its own right, which means that it’s completely distinct to its directors and shareholders. That’s really important, because it means that all the business assets, liabilities and profits belong to the company – and therefore, the shareholders are not wholly responsible for debts incurred by the company.
If you’re the director of a private limited company, then you’re considered an employee of the company, and that means that if a legal dispute or issue with debt arises, then it’s the company itself that’s sued or pursued, rather than the directors. So it’s an important layer of protection!
It’s also worth noting that limited companies can be private or public. Unlike a publicly limited company, where shares are traded on the stock exchange, a private limited company does not publicly trade shares. It’s limited to a maximum of 50 shareholders, so it’s a smaller entity. A good way to understand the difference between a private limited company and a public limited company is through this example:
- A private limited company is a small local retailer, like your small independent greengrocers.
- A public limited company is a large national retailer, like Tesco – with shares that anyone over the age of 18 can buy and sell.
TOP 5 ADVANTAGES OF A PRIVATE LIMITED COMPANY
LIMITED LIABILITY PROTECTION
When thinking about private limited company advantages, this one is pretty major. A private limited company is a legal entity in its own right. That means that if you’re the shareholder or director, your personal assets are completely separate from the company’s liabilities. So if the company faces financial difficulties or legal claims, your personal finances and assets are generally protected. You won’t be legally obliged to pay any outstanding company debts beyond the value of the shares you hold. So you can operate with a safety net and peace of mind!
ACCESS TO FUNDING
A big reason that lots of entrepreneurs decide to set up a private limited company is that private limited companies have a lot of different avenues for raising capital. One of the big challenges of setting up a business is finding funding for your start-up costs. With private limited companies, you have the option to issue shares to up to 50 investors, meaning that you can attract funding from a variety of different individuals or groups who believe in your idea. And because you’ve got plenty of shares to give away, you can get a lot of different people involved in funding your enterprise, diversifying to give you financial security.
It’s also often possible for private limited companies to secure loans and credit from financial institutions much more easily than other business structures. This is because of advantages of private limited company structure including its excellent limited liability protection and potential for good commerce. This means that it’s often a good option for securing the resources you need for expansion, research, development and other business initiatives. So it’s definitely worth bearing that in mind when you’re choosing your company structure!
PERPETUAL EXISTENCE FOR CONTINUITY AND STABILITY
A great advantage of private limited companies is that even if ownership changes due to the death, retirement, or departure of shareholders, the company will continue to exist.
Again, this is because a private limited company is its own legal identity, so its existence is not dependent on the presence or engagement of any particular individual or owner. This means that as long as there’s someone there to run it, the company will stay operational – even as big changes happen among the shareholders. That affords your company a huge level of stability and continuity, meaning that your customers won’t experience any disruption as shareholders come and go. It certainly makes for a smooth customer experience – and customers that have a great experience typically come back!
A PROFESSIONAL AND CREDIBLE IMAGE
While it’s easy to set up as a sole trader, taking the time to register your business as a private limited company has the advantage of lending your brand an air of professionalism and credibility. Clients, customers, suppliers and partners often perceive private limited companies as more established and reliable entities, often because of the perpetual existence they enjoy. Because they’re set up to last, customers can be confident that their orders will be fulfilled and completed for the foreseeable future.
The enhanced reputation afforded by the business structure of a private limited company can lead to better business relationships, increased customer trust, and improved opportunities for collaboration – all because people perceive your business to be professional and trustworthy.
Considering your tax obligations is a big part of deciding which company structure to use when setting up your business. The great thing about private limited companies, is that they often fare better than other business structures when it comes to tax. If you set up a private limited company, your business may be eligible for various tax deductions, allowances, and exemptions, ultimately leading to reduced tax liabilities.
As will all things related to finance and accounting, it’s really important to consult a tax professional to make sure you fully understand the potential tax benefits specific to your company and your jurisdiction. It’s vital to make sure you’re paying the right amount of tax – otherwise you might be hit with a nasty bill down the line road!
TOP 5 DISADVANTAGES OF A PRIVATE LIMITED COMPANY
COMPLEX FORMATION AND ADMINISTRATION
As with all company structures, there are disadvantages to setting up a private limited company. And one of the disadvantages of private limited company structure is that there’s quite a lot of admin involved in setting it up. The process involves fairly intricate legal and administrative procedures, from registering with the appropriate authorities to drafting watertight legal documents – and many founders find this princess to be time-consuming and costly, because it’s really important that these things are absolutely correct.
And it’s not just the set up that’s time-consuming, either. Private limited companies come with quite a lot of ongoing administrative tasks, including maintaining company records, filing annual reports and adhering to regulatory requirements. All of these things are absolutely doable, and they shouldn’t put you off too much – you just need to make sure that you’ve got the time and resources to get them done.
Alongside the formation and administration, there’s quite a lot of regulatory compliance you need to complete on an ongoing basis. When thinking about private limited company disadvantages, it’s worth remembering that these private limited companies are subject to variance regulations and compliance obligations imposed by government authorities. And it’s really important that you complete these to a really high standard, because failing to meet these obligations can result in penalties, fines, or even legal consequences. You need to make sure that you’ve got the resources to stay up-to-date with changing regulations and submit all of the required information on time. This can be a challenge for small businesses with limited resources.
LIMITED CONTROL AND DECISION-MAKING
Although one of the advantages to setting up a private limited company is that you can distribute ownership among shareholders to raise capital, the more of the company you divest, the less decision-making authority you retain. The power to make decisions will be split between shareholders according to their stake, which can lead to shared authority.
On the one hand, this often fosters diverse perspectives, bringing innovative new solutions to your business. On the other hand, attempting to balance the interests and opinions of multiple stakeholders can result in conflicts, disagreements, and challenges in making prompt decisions. It may become a time-consuming process due to the careful negotiation and compromise required to please all shareholders. So it’s a good idea to make sure you’re selling your shares to people you think will work well together!
RESTRICTIONS ON SHARE TRANSFER
Private limited companies often have restrictions on the transfer of shares. These restrictions can limit shareholders’ ability to easily sell or transfer their ownership interests to others. This lack of liquidity may be a drawback for individuals seeking the flexibility to exit their investment quickly. It’s worth bearing this in mind when you’re selling shares in your company!
TRANSPARENCY AND PRIVACY CONCERNS
In order to maintain a fair market, private limited companies are required to disclose certain financial and operational information to regulatory bodies and shareholders.
On the one hand, clients and customers often really value this insight into the companies they choose to work with, as it allows them to invest their time and resources in an enterprise that they can be confident is reliable and trustworthy. However this level of transparency may not align with businesses that value a higher degree of privacy. It also means that competitors and other stakeholders can gain insights into your company’s operations, potentially affecting your competitive advantage.
FREQUENTLY ASKED QUESTIONS ABOUT PRIVATE LIMITED COMPANIES
CAN A PRIVATE LIMITED COMPANY HAVE A VIRTUAL OFFICE?
Yes! A private limited company can have a virtual office. A virtual office, like the one offered by Impact Brixton, is a service that provides businesses with a physical address, mail handling services and other administrative support, without the need for a physical, dedicated office space. This arrangement can offer several benefits to a private limited company, including huge savings on overheads, a professional business address to give their brand credibility, the flexibility to work remotely, and the freedom to assemble a global team. And if you choose a workspace like Impact Brixton, you can also use their coworking space and meeting rooms for days when you need to touch base with your team face-to-face!
WHAT IS THE STRUCTURE OF A PRIVATE LIMITED COMPANY?
A private limited company is formally set up and registered with Companies House, and it’s set up to pay shares to its shareholders. It’s a legal entity in its own right, which means that it’s completely distinct to its directors and shareholders. A private limited company’s structure consists of shareholders, directors, and officers. Shareholders own the company through shares they hold, which represent ownership interests. Directors, appointed by shareholders, oversee daily operations and make strategic decisions. The board of directors, comprised of elected individuals, provides oversight and governance. Officers, including CEO and CFO, manage specific functions.
HOW IS A PRIVATE LIMITED COMPANY MANAGED?
A private limited company’s management is structured hierarchically to ensure effective governance and operational efficiency. Shareholders, who own the company through shares, hold ultimate authority and delegate management to the board of directors. The board, composed of elected individuals, sets strategic direction, policies, and oversees company affairs. Directors, appointed by shareholders, execute these strategies and manage day-to-day operations.
WHAT ARE 5 CHARACTERISTICS OF A PRIVATE LIMITED COMPANY?
Here are five key characteristics of a private limited company:
- Limited Liability: Shareholders’ liability is limited to the value of their shares. In case of financial distress or legal issues, their personal assets remain protected, offering a safety net.
- Restricted Share Transfer: Shares of a private limited company often come with restrictions on their transfer, allowing existing shareholders to maintain control over ownership and preventing easy share trading.
- Small Group of Shareholders: A private limited company is privately held by a small group of individuals, often including founders, family members, or a select group of investors. This fosters a sense of intimacy and a close-knit ownership structure.
- No Public Trading: Shares of a private limited company are not publicly traded on stock exchanges. Ownership changes occur through private transactions, maintaining confidentiality and privacy.
- Less Stringent Regulatory Requirements: Private limited companies typically face fewer regulatory obligations and public disclosures compared to public companies. This offers flexibility in governance and operations.
These characteristics contribute to the unique nature of a private limited company, emphasising limited liability, close ownership ties, and a balance between operational freedom and regulatory compliance.
CAN I REGISTER MY PRIVATE LIMITED COMPANY WITH A VIRTUAL ADDRESS IN THE UK?
Yes! You can register your private limited company with a virtual address in the UK. This is a great option for giving your private limited company with a professional postcode in a vibrant business hub like London, helping to build trust and respect for your brand. And the really good thing about using a virtual office is that it can save you tons of money on overheads, because you don’t have to pay any rent or bills on a physical space. A virtual office will handle all of your mail, and help you out with your administrative needs. Does that sound good? Check out Impact Brixton’s virtual office now!
There are a lot of company structures to choose from, and each has advantages and disadvantages. Despite the complex formation, regulatory compliance and restrictions on share transfer necessitated by setting up a private limited company, a private limited company can also give you fantastic liability protection, access to funding, perpetual existence and multiple tax advantages. And if you use a professional business address through either a physical or virtual office, it can give your brand a professional and reliable image.