Whether you are looking to start up a new business or are looking to take steps to grow and expand your existing business, you may have considered whether it would be worthwhile incorporating a limited company, otherwise known as Ltd.
In this article we will explore the advantages and some things to be mindful of when incorporating a private limited company in the UK.
What is a private limited company?
A private limited company, also known as a private company or LTD, is a type of business structure that is privately held and limited by shares. In a private limited company, the shares are owned by a select group of individuals or entities, often referred to as shareholders or members. The liability of the shareholders is limited, which means their personal assets are not at risk to cover the company's debts or liabilities beyond their investment or shareholding.
Unlike public companies, private limited companies are not listed on the stock exchange and cannot offer their shares to the general public. They are typically smaller in scale and often family-owned or operated by a close group of individuals. Private limited companies enjoy more privacy and have fewer regulatory requirements compared to public companies.
Private limited companies are governed by their articles of association and are required to register with the relevant government authority, such as Companies House in the UK and are required to file annual financial statements and comply with various legal and financial obligations.
Overall, a private limited company provides a separate legal entity for conducting business operations, limits the liability of shareholders, and offers a flexible and relatively simple structure for entrepreneurs and business owners to run their businesses.
Private company limited by shares:
The most common type of limited company for business start-ups is a private company limited by shares.
This type of company is managed by company directors and owned by shareholders. Any individual can be both a director and a shareholder.
The minimum number of directors and shareholders of a private limited company is one; although there are various advantages to having at least two, such as distribution of responsibilities, risk mitigation, access to capital and multiple perspectives when it comes to decision making.
Private company limited by guarantee:
A private limited company can also be limited by guarantee. This type of company is governed by its constitution and operates with the goal of fulfilling its stated purpose rather than maximizing shareholder profits, and so is mostly suited to charities and non-profit organisations.
Unlike other types of companies, such as those with shares, a company limited by guarantee does not have shareholders who own a portion of the company. Instead, it has members who act as guarantors. These members provide a guarantee or promise to pay a specific amount in the event that the company faces financial difficulties and is unable to pay its debts. The primary purpose of a private company limited by guarantee is often to pursue a specific charitable or social cause, and any profits or income generated are reinvested back into the business to further its objectives and mission.
Advantages of incorporating a private limited company
· Limited Liability: a private limited company in the UK has a separate legal personality from its shareholders which means that the shareholders of a company are not personally liable for debts or obligations of the company (provided that no personal guarantee has been granted by the shareholders). This protects the shareholders personal assets in the event of failure of the business and carries less individual financial risk than other business structures, such as a sole trader. Each shareholder is only limited to the value of their shares.
· Investment: new shares can be issued by a private limited company to raise capital from investors which can help the company to obtain funds to allow them to grow and in return the investor will hold shares in the company and be entitled to a percentage of its profits.
· Protect your business name: when you form your company, your business name will be registered with Companies House and placed on the official register of companies. This will protect your business name so no one else can incorporate a company under this name.
· Tax advantages: depending on the amount of salary you draw versus taking dividends, you may pay less personal tax. The business could fund a pension for you as a Director and claim it as a business expense, which is a tax advantage that is not available to sole trader. The company will be subject to corporation tax on profits earned.
· Business financing: depending on your business growth plans, financing and business loans with more favourable rates and repayment terms may be available because of limited company status.
Things to consider:
· There will be costs involved in connection with registering a company, such as incorporation fees and costs associated with transferring assets from an existing business if you are changing from another business structure.
· Becoming a director of a company comes with various obligations and responsibilities, such as the annual filing of a confirmation statement and financial accounts with Companies House each year, and a duty to always keep information on company directors and persons with significant control up to date. Companies can face financial penalties if filings are not made to Companies House on time.
Why would someone choose to register as a private company?
Entrepreneurs and business owners may choose to establish a private limited company to benefit from limited liability protection, increased credibility and trust, access to funding, perpetual existence, tax efficiency, and other advantages.
However, it also has some disadvantages, including higher administrative and compliance costs, less privacy regarding company information and restrictions on issuing shares and transferring ownership.
Ultimately, the decision to become a private limited company should be based on the specific circumstances and objectives of the business and should be made after careful consideration of the pros and cons.
It is important to note that choosing to become a private limited company should be based on thorough consideration of the specific circumstances and objectives of your business. It is recommended to seek professional advice from a solicitor to ensure compliance with relevant laws and regulations and to make an informed decision.
If you are interested in setting up a limited company or are unsure which type of business structure would be right for you, please get in touch with us and a member of our corporate team will be able to advise you.
Burnett & Reid are Aberdeen’s expert solicitors that has been the name that people & businesses have relied on locally for over 250 years.