Pros and Cons of Private Limited company

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In this article, we will break down the advantages of a private limited company, as well as its potential disadvantages in some scenarios. Using this information, you can decide what is best for your business.

As a business owner, you are faced with challenging decisions on a daily basis. Some of these may prompt you to steer an entirely new course for your business’s future. At some point, one of these questions could be whether to register as a limited company.

Although incorporation has a wealth of benefits, becoming a limited company should not be seen as a simple way of upgrading your enterprise. Every business is unique, and the benefits of becoming a limited company will depend upon your own circumstances and vision for the future.

The advantage of becoming a private limited company

To put it simply, a limited company setup will offer your business distinctive financial, legal, and professional gains, some of which will have a truly transformative effect. The following points show you some of the key benefits conferred by a limited company setup.

A unique legal status

In order to fully explain the advantages of a private limited company, it is first worth discussing its unique legal status. The most significant characteristic of a registered company is that it has been incorporated, gaining what is known as “legal personality”. In other words, a company is a separate legal entity to those who own or manage it.

This can be exceptionally beneficial. For example, a company could be the owner of property, or have the capacity to enter into legal relationships. However, perhaps the most noteworthy feature of this concept is that it limits your personal liability. A company’s debt or legal claims are directed at the company itself, as opposed to those who own or run it (including owners, directors, and shareholders). This means that in the event your business faces financial difficulties, your personal assets will remain protected. Likewise, if your company were to face legal action, the company itself would be held accountable. This legal concept is known as the ‘corporate veil’ and acts as a personal safeguard between a company and its managers.

In comparison, sole traders are personally liable for the debts, losses, and legal claims that their business might face. If your business were to become bankrupt, creditors could be entitled to claim your personal assets — including your own property. Or if a client took legal action, you could be sued for a considerable amount.

Although limited liability does not give you total legal immunity — such as from criminal or fraudulent acts — it is an important way of protecting yourself, especially if you run a business with high margins or risk.

Aside from limited liability, two more important legal benefits of a company set-up include:

  • Once you have created your company name, it is protected and cannot be taken.
  • A company may continue indefinitely. In essence, a company can survive the loss of its original members and can be transferred to different owners.

For those concerned with the legacy of their business, these are hugely significant.

A prestigious position

Having “Ltd” following your company name should not be underestimated; company formation will change the way you are perceived by the public. Companies are generally held in higher regard than sole traders, and many customers and suppliers will be more likely to place their trust in you. The impact of incorporation could potentially be more powerful than any marketing campaign or brand development that you devise as a business.

There is a reason to this increase in status, and it is perhaps less superficial than simply having ‘Ltd’ after your company’s name. It stems from the fact that registered companies face higher scrutiny than non-incorporated businesses, and there is greater transparency regarding their finances and corporate details. Moreover, a company’s statutory obligations are much stricter that those of a sole trader, and face monitoring from governmental bodies. Although this may be seen as a negative, it serves as a reassurance for those considering whether to invest their time and money into your business.

As a private limited company, you can therefore expect to see more business opportunities, and attract new clients and investors than before the change of status. In fact, companies dealing with higher-risk trade and contracts may have a policy of only working alongside other registered companies, mitigating their own liability.

Overall, being incorporated bestows a legitimacy that may be crucial for your business’s expansion.

Financial efficiency and control

Put simply, a limited company structure gives you more options regarding your finances and can be a more efficient system of business. Here are some of the most notable:

  • Limited companies in the UK presently only pay 19% Corporation Tax on their profits. In contrast, sole traders can pay anywhere between 20% to 45% on their Income Tax for all taxable earnings.
  • Companies can smartly (and legitimately) lower the tax they pay. As a director and shareholder of a company, you can lower your National Insurance contributions (NIC) by choosing a modest salary and drawing most of your income as dividends. You will have to pay Dividend Tax on dividend income over £2,000, yet this is still lower than Income Tax.
  • If your company is limited by shares, you can issue shares to a spouse or family member. Consequently, you can diversify your business’s profits and lessen personal tax liabilities.
  • As an owner and director of a limited company, you can contribute pre-tax income into a company pension scheme. In some circumstances, this can alleviate the total tax your company pays.
  • Overall, you have greater options and flexibility to plan around tax, such as withdrawing profits at a later tax year when there is a lower rate.

Disadvantages of being a private limited company

There are of course some instances when being a limited company can be less desirable. However, these disadvantages are a small price to pay for even a handful of the benefits that have been mentioned previously. With that being said, let’s consider some of the potential drawbacks.

Initial setup

Compared to the likes of a sole trader, limited companies are required to register with Companies House. Although it is easier than ever to achieve incorporation ­— especially through a formations company such as Uniwide — registering with HMRC as a sole trader is usually seen as more straightforward.

Administrative and financial duties

Overall, the accounting and administrative requirements of a company are more involved. This includes sending Companies House a confirmation statement at least once a year, ensuring your details are up to date.

Additionally, on an annual basis you will be required to report on your company’s activities for your financial year. Copies of these annual accounts must always be sent to the following:

  • All shareholders
  • Anyone who can attend the company’s general meetings
  • Companies House
  • HMRC (as part of your Company Tax Return)

It is very important that you adhere to any deadlines set out by Companies House or HMRC, or you could face severe penalties. It may therefore be the case that you are required to hire assistance to help shoulder the clerical side of running a company. For larger companies, it is advisable to hire an accountant, who will come at a financial cost.

Increased accountability

As a limited company, you are subject to greater scrutiny than non-incorporated businesses. Although this transparency has its own benefits (such as earned respect and trust) it does lead to less privacy regarding your business. Information that you provide to Companies House is made available to the public, including company accounts and the names of directors and shareholders.

As a director of a company, you also have a set of legal duties that you must follow, such as promoting the success of the company, and avoiding conflicts of interest. These directors’ duties are enshrined by statutory law, and penalties can occur for not following them.

Final thoughts

Ultimately, the advantages and disadvantages of a private limited company setup will largely depend upon your business and its goals. For some smaller enterprises, it may be more suitable to wait until your business has developed before seeking incorporation. However, if you believe you are being held back as a sole trader and want to improve the scope of your business, then becoming a limited company could have a transformative outcome.

The features that setting up as a limited company brings — not only to your business, but to yourself as an owner — are significant. Limiting your liability can empower you to trade with confidence, effectively equipping you with a ‘legal shield’ of sorts. Likewise, your existence as a registered company will reveal new avenues of business that were once beyond your reach. Finally, you will be given more options to deal with your finances, and can make some intelligent choices that could save you money.

If you do decide to run your business as a limited company, Uniwide Formations can act on your behalf to make the process as smooth as possible. We know each business is different, so we offer a range of company formation packages to incorporate your company or register a partnership. To find out more about our services and how we can help your business, contact us today.

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