What is a Private Limited Company?
If you have a great business idea and have started researching how to bring it to life, you might have come across this phrase. But what is a private limited company and why might you choose to form one? Let’s take a look.
Even if you are 100% confident about your business idea, you may decide it's best to limit your personal liability for debt if your company ever gets into financial trouble. That’s exactly what a private limited company is set up to help with.
There are two different kinds of private limited companies.
A private limited company is a company that can either be limited by shares or by guarantee:
Private company limited by shares:
This means that the company is owned by shareholders. The liability of each shareholder is limited to the original value of the shares issued to them.
Private company limited by guarantee:
When a private company is limited by guarantee, it has members who act as its guarantors. These members contribute a previously agreed amount to support the company in times of trouble.
When setting up your business it’s a good idea to look well into the future to decide where you want to be and where you wish to take your business. If you’re looking to grow your business setting up as a private limited company will help you to share the load and eventually, as the company is a separate legal entity, you could even take a back seat.
But there’s much more to gain from setting up as a private limited company, and while there’s more administration to set up, opting for the help of a formations agent can make it quick, easy and cheaper than you think.
Advantages of a Private Limited Company
There are two main advantages of a private limited company. First, it is a separate legal entity, meaning that if it hits bad times you won’t be personally liable - either financially or legally. Setting up as a limited company also makes it less personal when it comes to running your company, as you can share the responsibilities with others much more easily.
Sharing the work – with the ability to bring many more people into the mix you’ll be able to benefit from others’ expertise and skills, helping you to keep a clear head for business.
Income advantages – as well as limiting your personal liability you’ll also find there are tax benefits is another of the advantages of a private limited company. With the company paying Corporation Tax on taxable profits, you may be protected from higher income tax rates yourself.
Tax savings – a private limited company also has the advantage of more tax deductible allowances and costs, which are redeemable against profit.
Business continuity – as a business owner if you’re working as a sole trader and you wish to take time off, if you become unwell or if you simply wish to retire, your business will also need to go on hold or close. Setting up as a private limited company means you can choose other people to take control when you’re not there.
Disadvantages of a Private Limited Company
Many see the paperwork involved with setting up and running a private limited company as a barrier to getting started. There’s certainly a lot to consider when setting up a private limited company, but much of the hassle can be removed when you use a formations agent to help. Considerations include:
Set up costs – registering with Companies House, you’ll need to pay a fee. Using a formations agent you’ll probably find this is cheaper than going direct and costs a lot less than you may think.
Company accounts – the financial information you need to file is more complex when you’re registered as a private limited company, although this information can also help you to keep a keen eye on your company’s productivity and profitability. And your accounts don’t need to cost the earth to get right.
Shared profits – the profits of a limited company are distributed among shareholders or channelled back into the business. Many private limited companies benefit from this and with investment from profits may grow more successfully.
Setting up a Private Limited Company
Setting up a private limited company is a simple process and you could be the owner of your own company in a matter of hours. If you’re not ready just yet, continue to browse the help centre for more advice on some of the key terms associated with setting up a business.