21 September, 2022
Discover the Most Known Advantages and Disadvantages of Operating as a Private Limited Company
When starting your own business, you should carefully consider what type of company you’d like to run. Sole traders, partnerships, limited companies — each business model has its good and bad points. It’s important to weigh these carefully before making your decision.
Further down, we consider private limited company advantages and disadvantages. Explain who can benefit from this type of business model, and set out the pros and cons of being a private limited company in the UK.
So, whether you’re based in London or looking to open a business in the UK as a foreigner, read on to find out all about private limited companies if you’re considering starting up your own corporation.
What Is a Private Limited Company?
Before we tackle the advantages and disadvantages of being a private limited company, it’s worth briefly explaining what exactly this type of business is.
Alongside solo traders and partnerships, private limited companies are one of three business models used in the UK. When an individual creates a private limited company, it means they have created their business as a legal entity separate from themselves. This implies that the financial liability of the company owner, and any other members involved, will never exceed the number of shares they hold in the firm.
With a private limited company, personal and business finances are kept separate. So if the company gets into any debt, this money will not have to come from the owner or company shareholders but rather from the company itself.
Who Can Benefit from Operating as a Private Limited Company?
The advantages and disadvantages of a private limited company are varied and numerous. Choosing this time of business model is often an exercise in compromise: what benefits do you value most? And how do they stack up against the drawbacks?
Many decide that the advantages far outweigh the disadvantages, however. This certainly seems to be the case in the UK, where private limited companies account for approximately 4.5 million businesses throughout the country — making operating a business as a private limited company the second-most popular way to run a business in the UK.
This business model is widespread across all industries and for companies of all sizes, whether small, medium, or large, whether it's a law firm, plumber, or restaurant. But what are private limited company advantages and disadvantages to be aware of? That’s what we’ll consider next.
What Are the Top Five Advantages of a Private Limited Company?
When deciding whether you want to use this business model, you should take the time to carefully weigh private limited companies’ advantages and disadvantages. You are the only one who can decide whether the benefits attached to a limited company can outweigh the negatives.
In this section, we’ll consider some of the main draws of running a private limited company. These are some of the most crucial benefits to consider when setting up your business.
1. Minimising Personal liability
Business owners who opt for this business model benefit from limited liability. In plain English, this means that, unlike solo entrepreneurs, people who structure their operations this way aren’t fully liable and responsible for their company. All their assets and funds are protected legally.
Hopefully, your business will thrive and prosper — but it is beneficial to think ahead and consider what you would do if it were to go under or get into serious debt. When your firm is a private limited company, you can choose to help out using your personal assets, but you are not obligated to do so.
2. Professional Image
Private limited companies must be listed with Companies House. This trademarks your brand name, protecting the individuality of your business and making it easier for potential customers to find it via online searches. What’s more, if your company is the only one out there with a given name, this will drastically help to strengthen and improve your brand image.
To a greater extent, private limited companies often give the impression of being larger than they really are, helping them come across as more prestigious. This can help boost not only your performance with clients but also the interest of investors and banks.
3. Less Paperwork Needed
When forming a private limited company, you may find yourself confronted with expensive, time-consuming legal duties. This aspect, unfortunately, is unavoidable; to run as a limited company, you must meet certain regulations and guidelines.
But as much as some of the paperwork might be expensive or confusing, you deal with far less of it when running a limited company compared to some other business types. In all likelihood, you’re not a great fan of filling out and filing away endless forms. When operating your company according to this model, you won’t have to deal with as many administrative obligations.
4. Business Pension Scheme
Limited company owners can place pre-tax funds into a business pension scheme rather than putting them in a private account. This helps them save money in the long term by protecting funds from having to cover personal and business taxes.
Retirement may seem a long way away right now, but it’s always sensible to plan ahead for the future. A business pension scheme is just one way you can provide for yourself later down the line.
5. Tax Efficient
The tax efficiency of private limited companies is another significant benefit to this type of business structure. For one thing, you are not required to pay National Insurance Contributions (NIC) on dividends, and they are also taxed at a lower rate than income from self-employment. This matter is important because, as a business owner, a significant amount of your earnings will come from dividends.
Furthermore, private limited companies pay a lesser amount of Corporation Tax on their revenue stream than sole traders, with each of them paying 19% and 20-45%, respectively.
Five Top Disadvantages of Private Limited Company Ownership
We will now move on to consider the drawbacks in explaining the advantages and disadvantages of private limited company ownership. The benefits are clear and not inconsiderable, but when deciding on the pros and cons of private limited companies, it is only fair that we devote an equal amount of attention to examining the negatives.
To that end, in this section, we will discuss five of the main drawbacks of running a business using this model. Read on to develop a fuller understanding of the advantages and disadvantages of operating as a private limited company in the UK.
1. You must be incorporated with Companies House
While considering the advantages of running a private limited company, we explained some benefits of registering with Companies House. However, there are some drawbacks to being incorporated with them, as well.
For one thing, incorporation is not free. Registering with the agency is mandatory, and you will be obliged to pay a fee. Additionally, once you’ve registered with Companies House, your business address and other details will be made a matter of public record. If you wish to maintain your company's privacy, this can be a significant downside.
Before starting up your own limited company, it would be wise to look into how to register a company first.
2. Complicated accounts
Limited company accounts are more complex than those belonging to other business models. As the company director, you must keep accurate monthly records of tax returns, expenses, and other financials. Keeping your paperwork in order can prove quite challenging, and you’re likely to find that you need to bring an accountant on board to keep a handle on things.
While an accountant can take the stress of maintaining business records off your shoulders, they still represent an additional cost.
3. Shared ownership
Most of the time, limited companies have both directors and shareholders. These shareholders have direct input in how the business is operated — and the more shares they own, the more input they get to have and the less ownership you have over your own business.
In short, you should be able to share some of the decisions for your company. Perhaps this won't bother you if you don't mind sharing authority. But if you are the kind of person who prefers to make your own decisions, this may influence you to choose another business structure.
4. Your company must be in compliance with strict administrative requirements
No one enjoys paperwork, but it’s an inevitable part of running a business, no matter which model you adopt.
When you decide to operate as a private limited company, however, you will be expected to keep detailed records of your business, including taking minutes during meetings and making notes of any decisions made by directors or other senior staff.
5. Limited stock exchange access
Since the maximum number of shareholders is restricted, private limited companies cannot offer large numbers of shares to the public. This means that they often have very restricted access to stock exchange markets.
Consider the Hoxton Mix Your Trusted Company Formation Partner
For every advantage of a private limited company, there’s a disadvantage — but this is the case for any business model, not limited companies alone. Choosing which one is best for you is not a case of finding a flawless option. Instead, you need to weigh your options and decide on the most promising overall.
This can be intimidating, especially when you’re opening up your first business. How can you be sure that you’re making the right decision? Here at Hoxton Mix, we can help with that.
We provide our clients with a virtual business address in the heart of London — a thriving metropolis and cultural center. Not only that, but we can also help with UK company formation, enabling you to get your business off the ground.
If you’d like to retain our services or even just ask for a little advice on how to set up a limited company online, get in touch today.
This article has considered private limited company advantages and disadvantages to help you come to a better understanding of whether this business model is the correct one for your own enterprise. For some, operating within this structure works well; for other business owners, an alternative may be a better option.
In our explanation of private limited company advantages and disadvantages in the UK, we covered this model's top five benefits and minuses. While this article shouldn’t be considered comprehensive, we believe this will give our readers a fair understanding of private limited company disadvantages and advantages.
What are the advantages of operating as a private limited company?
There are numerous advantages and disadvantages of a private limited company business, but, the pros can outweigh the cons for many. When using this business model, you will benefit from a more professional image, better pension schemes, and tax efficiency. Furthermore, as the owner, you will not be held personally liable for your business's finances because it is legally considered a separate entity.
What are the disadvantages of operating as a private limited company?
As well as numerous benefits to running a private limited company, there are also disadvantages. Some of the main ones include complicated business accounts, having to incorporate with Companies House and having to pay for it, and having to share ownership of your company with shareholders.
Will running my business as a private limited company save me money?
Some may wonder whether it’s a better idea for a new business owner to choose a private limited company format over that of a sole trader. From a monetary view, you may have to pay fewer taxes when operating as a limited company, meaning you will earn a greater profit in the long run.
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