Advantages & Disadvantages of being a Private Limited Company for UK Businesses

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When starting your own business, you should carefully consider the type of company structure you want.

There are several options to choose from, each of which presents advantages and challenges, including:

• sole trader
• partnership
• private limited company

In this article, we’re going to explore the advantages and disadvantages of setting up a private limited company in the UK, 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 in the UK.

So, whether you’re based in London or looking to open a business in the UK as a foreigner, the information below will definitely be of value if you’re considering starting your own company.

Introduction to private limited companies

Before we tackle the advantages and disadvantages of being a private limited company, let’s define what one is.

A private limited company (Ltd) is one of the most common business structures in the UK.

It’s a separate legal entity from its owners, which means the company itself is responsible for its debts and obligations, not the individuals who run it—unlike with the sole trader business structure.

Ownership is divided into shares, which are held by one or more shareholders, while the day-to-day running of the company is usually managed by directors.

This structure offers limited liability, so the personal assets of shareholders are protected if the business runs into financial difficulties, but more on this in the next section. A limited company must be registered with Companies House, and is required to submit annual accounts and a confirmation statement, making it a more regulated option than operating as a sole trader. Again, we’re going to cover these points in detail later.

Who can benefit from operating as a private limited company?

Operating as a private limited company can be particularly beneficial for business owners who are planning to grow, employ staff or work with larger clients. Many corporate customers and government contracts prefer dealing with limited companies as they are seen as more established and trustworthy than sole traders.

Setting up a private limited company is also attractive for business owners who are looking for greater tax efficiency, particularly if their earnings are rising above the higher and additional UK tax rates. Sole traders are taxed on all profits as income, while limited companies pay Corporation Tax and give owners flexibility in how they withdraw money, resulting in lower overall tax liabilities.

For founders hoping to scale their business, sell their business, reinvest profits or build more credibility and trust in competitive industries, incorporating as a private limited company will often be a better strategic option than forming as a sole trader.

Advantages of a Private Limited Company

When deciding whether you want to use this business model, you should take the time to carefully weigh up the advantages and disadvantages.

In this section, we’ll examine the six key reasons business owners consider setting up a private limited company.

1. Minimising personal liability

Arguably, the biggest advantage of setting up a private limited company is that it provides limited liability protection. This means the company is treated as a separate legal entity, and it is therefore the company—not the business owner(s)—that is responsible for its own debts and obligations.

If the business faces financial difficulties or legal claims, shareholders are only liable up to the value of their shares or any guarantees they have made. By contrast, a sole trader has unlimited liability, meaning personal assets such as savings, property, or vehicles could be at risk should you find yourself unable to pay your business debts.

2. Tax efficient

In the UK, many business owners find it more tax-efficient to operate as a private limited company rather than remain a sole trader. The main difference lies in how profits are taxed:

Sole traders pay income tax on all profits, plus Class 2 and Class 4 National Insurance Contributions (NICs), with higher earnings pushing you into the 40% (all earnings above £50,271 per annum) or 45% (all earnings above £125,140 per annum) tax brackets.

By contrast, limited companies also pay tax on profits, but at a lower rate than sole traders on higher earnings. The current rate of Corporation Tax in the UK is 25%, which is higher than the Basic Rate of 20% on earnings between £12,571 and £50,270, but significantly lower than the 40% rate on earnings above £50,271.

An additional benefit is that the owner can then decide how and when to withdraw funds, giving greater flexibility and control. The most common way to do this is through a salary–dividend strategy:

• Take a modest salary—often around the personal allowance threshold of £12,570—ensuring you qualify for state pension contributions, while still keeping NICs low.
• Any additional income is taken as dividends, which are taxed at the lower Corporation Tax rate. What’s more, there are no NICs payable on dividends, while the first £500 of dividends is also tax-free.

The current dividend tax rates can be found below:

• 8.75% (basic rate)
• 33.75% (higher rate)
• 39.35% (additional rate)

This structure significantly reduces the overall tax burden, allows more profit to be reinvested, and provides long-term efficiency for growth.

3. Professional image

Private limited companies are required to be listed with Companies House, but this requirement does offer an important advantage.

Although being a sole trader or private limited company doesn’t speak to the quality of the services you offer, some potential clients will trust a limited company more, simply because they see it as more established and professional. This will be the case particularly if you want to work with larger clients.

There’s also a more tangible reason that your business will garner greater trust, and that’s because you’ll be discoverable on Companies House, making it easier for potential clients to authenticate you as a genuine business.

4. Easier to access funding

Private limited companies have much greater access to growth funds, including bank loans, venture capital and crowdfunding, because financial institutions and investors see limited companies as lower risk compared to sole traders.

You can also raise additional capital by selling shares in your business, although you won’t be able to offer them for public sale like a public limited company can.

5. Protects your business name

When you register your business with Companies House, you must provide an official name for the company, and once you’ve done so, no one else can use it when registering their business—although note that you should do a Companies House namecheck first.

However, note that this does not stop someone else from registering all or part of your company name as their trade mark, or from using it in their branding. Businesses are often registered under slightly different names from their public-facing brand anyway, so while this is a benefit, it’s important to also trademark your brand name to fully protect it from being used elsewhere.

6. Business pension scheme

Limited company owners can make employer pension contributions using pre-tax company profits, rather than simply paying themselves more money in the form of taxable salary or dividends. This helps business owners reduce their Corporation Tax liability because pension contributions are an allowable business expense.

By contrast, sole traders must make their own provision by joining a personal pension scheme and making regular payments.

Disadvantages of a private limited company

We’ve covered some pretty compelling reasons for forming a private limited company, but before you head over to the Companies House website, it’s worth considering these disadvantages.

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, with Companies House registration charging 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.

Currently, it’ll cost you £50 to incorporate your business online or via software, or £71 if you want to do so by paper. Need to incorporate the same day? This can only be done via software, and will cost you £78.

Before starting up your own limited company, it would be wise to look into how to register a company first.

2. More paperwork

Compared to operating as a sole trader, there is more paperwork required when forming a new limited company. Unfortunately, this is unavoidable because to run a limited company, you must meet certain legal regulations.

There is some good news, though—there are company formation services that are relatively inexpensive that can take care of this for you, and it’s more than worth the money to make sure you get it right.

Also, note that if you want to revert to sole trader status, the process for this is awkward.

If your company is solvent (it can still pay its bills), you will need to either apply to get the company struck off the Register of Companies or start a member’s voluntary liquidation.

If your company is insolvent (it can no longer pay its bills,) you will need to arrange the liquidation of your company or apply for a company voluntary arrangement.

A simpler alternative is to simply allow your company to become dormant if you’re no longer trading and no longer receiving income, which will give you the option to return to a limited company structure in the future.

3. Complicated accounts

Among other disadvantages of a private limited company is that its accounts are more complex than those of other business models.

As a company director, you’re responsible for maintaining meticulous monthly records of tax returns, expenses and other financial details. Keeping all your paperwork organised is a demanding task, and you may find it necessary to employ 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, but it's important to note that hiring one does come with an additional cost.

If an accountant is a consideration, we have some offers on our marketplace for both accounting firms and software providers:

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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 comply with strict administrative requirements

Each year, directors are legally required to file annual accounts and a confirmation statement, even if the company is not actively trading. Companies are also expected to maintain accurate financial records, including details of income, expenses, assets and liabilities.

These obligations create more paperwork but ensure transparency, accountability and compliance with UK company law. If you employ an accountant or bookkeeper, they can support you with this, but this comes at a monthly cost.

5. Public scrutiny of business records

Each year, limited companies must disclose financial statements to relevant regulatory authorities, all of which are made public via the Companies House website. This means that competitors, investors and other third parties can inspect them, making it difficult to maintain confidentiality about things like turnover, ownership or any significant business changes.

Consider 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 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.

Final thoughts

Since 2010, we’ve served over 60,000 businesses all over the world, including sole traders and small-to-medium-sized private limited companies, generating a lot of positive reviews. We boast a 4.8* rating on Trustpilot and 4.7* on Google Reviews thanks to the quality of our service, so what are you waiting for?

If you’re ready to explore address alternatives for your business, discover our virtual address solutions starting from £0.63 a day.

Have questions? Contact us via live chat, call 020 3475 3374 or email help@hoxtonmix.com.

FAQ

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 liabilities 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 a greater administrative burden.

Will running my business as a private limited company save me money?

Setting up and running a private limited company costs more money than operating as a sole trader, while we’d also recommend working with a professional bookkeeper or accountant to keep everything in order. However, you can be much better off depending on how much you earn per year, thanks to the more favourable Corporation Tax rate and Director Dividend tax rate.

What are the tax benefits available to private limited companies?

Private limited companies pay Corporation Tax on profits, which is currently 25% in the UK. This is higher than the Basic Rate of Income Tax (20%), but significantly lower than the Higher Rate (40%) and Additional Rate (45%), so you need to calculate your annual earnings to figure out which is best for you. Note that company directors can also split their income between salary and dividends, the latter of which are taxed at a much lower rate than standard income.

Is limited liability protection an advantage of a private limited company?

Yes, limited liability is definitely one of the main advantages of a private limited company. Unlike a sole trader, when you’re the director of a limited company, your personal assets stay separate and shielded from any business debts or legal issues. This ensures that your personal wealth is safeguarded, with only the value of the company shares you own being liable to cover any unpayable debts or losses.