14 November, 2023
Understanding the Advantages and Disadvantages of a Private Limited Company
When starting your own business, you should carefully consider what type of company you’d like to run. There are several options to choose from: sole traders, partnerships, limited companies. Neither of them is “perfect” though, because each presents a set of advantages and challenges. Among these, private limited companies emerge as a compelling choice for ambitious entrepreneurs looking to establish a strong presence in the corporate landscape.
Further down, we are going to shed light on the limited company advantages and disadvantages, offering invaluable insights to entrepreneurs and foreign investors alike. We'll have a closer look at who can truly benefit from this business model and examine the specific nuances that apply to the UK.
Don’t hustle with the choice, and give yourself some time for a thorough consideration. It’s important to weigh all the pros and cons of a private limited company before you make a final decision.
So, whether you’re based in London or looking to open a business in the UK as a foreigner, the information in this article will definitely be of value if you’re considering starting up your own corporation.
Introduction to Private Limited Companies
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, they are essentially giving birth to a separate legal entity for their business. 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, which is pretty neat!
One pleasant bonus about privately held limited companies is that they offer a concept called "limited liability." It means that if your company ever faces debts or legal issues, your personal assets, like your car or house, are usually protected. The responsibility for repaying those debts typically falls on the company itself rather than on you as an individual. Of course, there are exceptions to this rule, like cases involving fraud or wrongful trading, but in general, limited liability is a great perk.
Another great feature of private limited companies is their ability to raise capital by issuing shares. You can basically attract investors and get funding for your business by offering them a slice of the ownership pie in the form of shares. Shareholders have certain rights and privileges, such as voting in important company decisions.
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.
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
For business owners exploring the private limited company business model, there are valuable benefits tied to 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 always wise 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 have the freedom to choose the best course of action in case your business hits a rough patch, be it savings or personal assets, however you are not obligated to do so.
2. Professional Image
Private limited companies are required to be listed with Companies House, and this requirement brings several important advantages. First and foremost, it provides trademark protection for your brand name, ensuring its distinctiveness and facilitating its discoverability through online searches. This legal safeguard helps preserve the individuality of your business and enables potential customers to easily find your company online, enhancing your visibility and accessibility in the marketplace.
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 legal regulations.
But as much as some paperwork might be expensive or confusing, you deal with far less of it when running a limited company compared to some other business types. Let's face it, filling out and filing numerous forms is not exactly anyone's favourite activity. The good news is that when you count as a legal identity, you'll have fewer administrative obligations to deal with.
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. Starting a limited company is a smart and forward-thinking choice that sets you up for a future filled with financial peace and the ability to enjoy the fruits of your labour.
5. Tax Efficient
The tax efficiency of private limited companies is another significant benefit of 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. This allows you to reinvest in your business, expand your operations, or allocate funds for personal goals, all while maintaining compliance with tax regulations.
Disadvantages of a Private Limited Company
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 we've highlighted the advantages of registering a private limited company with Companies House, it's important to also consider the potential drawbacks associated with this process.
First things first, let's talk about the cost. Incorporation is not a free process, unfortunately. Companies House registration requires mandatory fees that you'll need to factor into your budget. It's always good to be aware of any associated expenses when starting your limited company journey to avoid going bust.
One thing to keep in mind is that once you've registered with Companies House, some details about your business, like your business address, become part of the public record. This means that anyone can access this information, which could affect your desire for privacy. If confidentiality is a top priority for you, this aspect might be seen as a downside.
Before starting up your own limited company, it would be wise to look into how to register a company first.
2. Complicated accounts
Among other disadvantages of a private limited company is that their accounts are more complex than those belonging to other business models. As a company director, you are responsible for maintaining meticulous monthly records of tax returns, expenses, and other financial details. Keeping all your paperwork organized can prove to be quite a demanding task, and you may find it necessary to enlist the services of an accountant to effectively manage these complexities.
Having an accountant on board can certainly alleviate the burden of maintaining your business records. It's important to acknowledge though that hiring one does come with 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 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
Unlike publicly traded companies, private limited companies have stricter regulations on the number of shareholders they can have. This limitation can significantly impact their ability to access stock exchange markets, where large-scale trading and investment opportunities are prevalent.
While public companies can freely offer shares to the public, private limited companies have more restricted options. They typically rely on private placements, venture capital funding, or limited offerings to a select group of investors. This restricted access can limit their ability to raise capital from a wide pool of investors and potentially hinder their growth and expansion plans.
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. Considering all the private limited company’s pros and cons alongside other business types, how can you be sure that you’re making the right decision? Here at The 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 centre. 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.
What are the tax benefits available to private limited companies?
Private limited companies enjoy several tax benefits that positively impact their financial standing. You can apply for lower tax rates, tax deductions for legitimate business expenses, and defer tax payments. Moreover, private limited companies may be eligible for various tax incentives and exemptions provided by the government.
Is limited liability protection an advantage of a private limited company?
Limited liability is definitely one of the main advantages of a private limited company. Here’s why: your personal assets stay separate and shielded from any business debts or legal issues. You can breathe easy knowing that your personal wealth is safeguarded, allowing you to focus on thriving in your venture. So, limited protection has you relaxed, ensuring that your bank account is safe and sound.
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