Limited Company Advantages And Disadvantages

What Is A Private Limited Company?

A private limited company has a separate legal identity of its own a can be a large or small business. It does not have publicly traded shares and is limited to having a maximum of 50 shareholders. A private limited company offers greater protection for the business owner as the only capital at risk is the investment and not the personal finances. If the business were to accumulate any debt, it is the business that would be liable to pay, not the owner. This business structure is ideal for a small business or a start-up business because of the degree of security provided.

Sole traders have full liability for the business, including business debts and losses, whereas a private limited company has limited liability.

Minimum Requirement For A Private Limited Company

The minimum requirements for UK limited companies are generally quite simple:

At least one limited company director must be appointed.
The company must have a registered office address in the UK.
One natural person must be appointed as director.
A minimum of one share must be issued by the company at the time of incorporation.
The company name should not be similar or identical to any other company name registered with Companies House.

Private Limited Company Registration Process

There are several steps to registering a limited company yourself, which are as follows:

Register the company with Companies House, which can take up to 24 hours with a cost of £12 for submitting your registration online.
You will need to select a company name and company director as well as have a UK registered office address. This address will be made public by Companies House and HMRC so that official information can be sent to the company.
You will need to submit Memorandum of Association which is a legal statement signed by the people forming the company and includes names and addresses of company directors and shareholders.
You will need to submit The Articles of Association that states shareholders rights and powers.
You will need Form 1N01 which is a document that lists the details of company directors, shareholders, details of shares issued and share capital.
All templates for these documents can be found on the Companies House starting a company section.

You can choose a company formation agent or use a solicitor to also register your business. They can handle all the relevant paperwork and submit the required documents to Companies House.

Advantages Of Private Limited Company

No Minimum Capital

There are no minimum capital requirements for a private limited company other than at least one share issued on incorporation, which is usually less than £100.

Separate Legal Entity

A Private Limited Company is a separate legal entity in its own right, which means that the assets and the liabilities of the company are not the same as those of the Directors. Both are recognised as being separate.

Limited Liability

Where a sole trader would have full liability of a business, if a limited company runs into any trouble, all personal assets will be protected by what is referred to as the company veil. It is the company that will be liable for any debts, losses or legal claims, and protect the directors from such liabilities. As for the shareholders, they are under no obligation to pay any more than the value of the shares they already hold in the business.

Fund Raising

A Private Limited Company is not limited to one owner like a sole trader, which means that if the company needs to raise capital or funds, it can do so by selling its shares to investors.

Free And Easy Transfer Of Shares

Shares of a company can be easily transferred by a shareholder to any other person.

Private Limited Companies have shares which can be issued to a family member or spouse. You can use this to your advantage as it enables you to split the profits and minimise tax liabilities. By issuing dividends to your children or spouse, you have the advantage of their tax-free personal allowance, basic tax rate with a dividend allowance of £2000.

Uninterrupted Existence

A Private Limited Company can exist without any interruptions until it is legally dissolved. As it is recognised as a separate legal entity, its existence is unaffected by any changes in membership, making this one of the significant characteristics for a limited company.

FDI Allowed

Foreign Direct Investments (FDI) are allowed in Private Limited Companies, which means that any foreign person or entity can invest in this nature of company.

Builds Credibility And Reputation

All fundamental specifics of a Private Limited Company are available on a public database, which enhances company credibility as details can easily be authenticated.

Complete Control Of Your Business

You get to have complete control over your business and financial affairs, which means that you don’t have to risk your money with an umbrella company or third-party administrator.

Tax Saving Advantage When You Are A Registered Limited Company

No matter what your company, everyone is liable to pay tax, however having a Private Limited Company means a tax return of only 19% Corporation Tax on profits. Whereas a sole trader has to pay 20 -45% income tax on their profits. You can also keep surplus income in the business, rather than withdrawing all of the annual profits which can help to pay for any future costs.

Protect Personal Assets

As a limited company, if the business fails or runs into any difficulties, personal assets will be protected. As a shareholder, you cannot be held liable for company debts or losses which in effect protects you from personal risk.

Disadvantages Of Private Limited Companies

Paperwork Involved

One of the defining disadvantages when it comes to a limited company is the level of administration and regulation required. However, if done monthly, it may help reduce the overall workload.

Accounts Need To Be Filed Every Year

Every year a Private Limited Company must file the following:

A set of accounts
An Annual Return
A Corporation Tax Returns
A Personal Tax Return if you’re a company director

Costly If Contracting For A Short Period Of Time

Having a limited company can be costly. If you have a short-term contract and then decide to return to full time employment, you will still have to submit your end of year limited company accounts.

Not Ideal For Contracts Less Than £25,000 A Year

Although it depends on your contract, it is worth noting that this is a general rule. We do recommend consulting an accountant for their professional advice.

Legal Duties

Being the director of a private limited company poses a series of legal duties, and obligations that must be fulfilled to safeguard the company’s assets. Failure to do so may result in costly fines and severe penalties.