Want to start a business? Private limited companies are an option. Here are the main advantages of a private limited company, and how to set one up.
What is a limited company?
Before we get started, let’s clarify what it means to be a ‘limited company’.
When you form a limited company, you essentially create a new entity with its own legal status. In other words, a limited company is completely separate from its owners.
There are two types of limited company:
- Public – you offer the public a chance to invest in your company.
- Private – the company doesn’t trade shares publicly.
We’re focusing on private limited companies, or PLCs.
Private companies can be:
- Limited by shares – owned by shareholders.
- Limited by guarantee – run by guarantors who invest the company’s profits back into the company itself. These are usually charities or other nonprofits.
There’s one major advantage of a private limited company, and that’s limited liability. But what does limited liability mean? Let’s take a look.
How limited liability works
Essentially, a limited company is responsible for its own debts. In other words, creditors can’t hold shareholders or directors personally liable for all of the company’s debt. So, if you’re a shareholder in a struggling company, you’re only liable for a certain portion of the debt.
How much are you liable for? Well, it depends, but usually it’s limited to the starting value of the shares you hold. So, if your shares started out worth £30,000, that’s all you’re liable for – even if the company itself owes £500,000.
Unsurprisingly, limited liability is really appealing for business owners.
Can anyone ever hold shareholders or directors personally liable for the company’s debt? In certain circumstances, yes. For example, if you commit fraud, you’re liable for the financial damage.
Advantages of a private limited company
Sure, limited liability is an obvious reason to set up a private limited company. The advantages are pretty self-explanatory. But what are the other advantages?
Share capital is really important. Why? Because you can quickly sell shares to outside investors, who may help you grow the business.
Crucially, investors are only liable up to the value of the shares they purchased. So, you may attract more investors because they know they’re pretty well protected if the company fails.
Private limited companies are tax-efficient. Your salary is a deductible business expense, and you only pay corporation tax on profits at a flat rate of 19%. Sole traders, on the other hand, pay tax on all profits above the annual taxable allowance.
Also, if you draw your income from dividends rather than taking a large salary, you can reduce your national insurance contributions (NICs).
It’s critical that private limited companies keep comprehensive financial records, and detailed minutes of shareholder decisions. How does this help your reputation? Well, it makes your business seem more transparent, which may encourage larger companies to work with you.
Usually, whatever contribution the company makes towards your pension is tax deductible. Again, this is a great way to reduce your tax liability while increasing your future pension.
Private limited company disadvantages
Okay, so now we’ve covered the advantages of a private limited company, but what are the drawbacks? Let’s briefly take a look.
- From annual accounts to bookkeeping, there’s a lot of admin involved.
- You may need to employ accountants and admin staff to help you stay on top of this paperwork.
- Unless you’re the sole shareholder, you can’t make decisions on your own.
- Since you’re not personally responsible for all of the company’s debts, you may need to offer personal guarantees to secure a business loan.
Essentially, it’s more complicated – and potentially more expensive – to run a private limited company than it is to set up as a sole trader. However, for many business owners, the pros outweigh the cons.
How to set up a private limited company
Ready to start your own private limited company? Here’s what you need to do.
- Choose a company name. Check what names you can use over at Companies House.
- Appoint at least one director and shareholder. A shareholder can be a director.
- The directors and shareholders sign the memorandum of association to confirm they’re forming a company.
- Draw up some “articles of association”. Essentially, these are just the company rules. You can always use template articles rather than drafting your own.
- Register your company with Companies House.
The main advantage of a private limited company is how much you can limit your financial liability. In other words, there’s only so much you’re liable for if things go wrong. However, it’s not the right model for every business, and there’s a lot of paperwork involved.
If you’re unsure whether a private limited company is right for you, contact a commercial lawyer or accountant for advice.
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