10 Advantages of a Private Limited Company

What is a Private Limited Company?

A private limited company, often abbreviated as Ltd, is a business entity that is privately owned by shareholders. It is registered under the Companies Act and operates as a separate legal identity from its owners. The liability of shareholders is limited to the amount they have invested in the company, providing protection for their personal assets.

Private limited companies have specific features and requirements, such as a minimum number of shareholders and restrictions on the transfer of shares.

Advantages of a Private Limited Company

1. Limited Liability
2. Higher Take Home Pay
3. Separate Legal Entity
4. Credibility and Professionalism
5. Easier Access to Capital
6. Better Professional Status
7. Confidentiality and Privacy
8. Flexibility in Ownership
9. Tax Advantages
10. Better Income Splits

1. Limited Liability

One of the biggest advantages of a private limited company is limited liability. This means that the personal assets of shareholders are protected. If the company faces financial trouble or legal claims, the shareholders' personal wealth remains safe. They are only liable for the amount they have invested in the company. Your responsibility for your company’s debt is capped at the number of stock market shares you own in that company. This protection can give business owners peace of mind, knowing their personal finances are not at risk.

Example

Imagine you’re running a limited company, and you have a share capital of £2,000.

You decide to take out a loan of £5,000. However, things take a turn for the worse and you’re unable to keep up with payments.

If your company continues to defer on the loan payments, your company will be charged with non-payment of the interest on the loan, and non-payment to your creditors. In line with the law, your company will be dissolved - but you’ll only be liable for the number of shares you hold. In this case, that amounts to £2,000.

Do note that there are exceptions to this rule.

If you’ve signed a personal guarantee, or if your creditors lose money due to fraudulent activities you've carried out as the company director, your liability won’t be capped, and you will have personally liable for the debt.

In contrast, sole traders do not enjoy the same protection. If you run into trouble as one, your personal liability is essentially uncapped. This could put all your personal assets and personal income at risk.

2. Higher Take Home Pay

Who can turn their nose up at the prospect of increased take-home pay? Well, that's the principle benefit of setting up a limited company and one of the main factors that drive people to switch from a sole trader.

As a director of a limited company registered at Companies House, the way you pay tax is different from how you pay as a sole trader. As a sole trader, you'll pay 20% or more on everything you earn over the tax threshold. As a limited company director, you typically pay yourself with the mix of salary and dividends, where the salary amount is typically small, so you incur as little personal tax as possible. The majority of your income will come in the form of dividends and dividends are taxed at a much smaller rate (as opposed to personal income), meaning you're able to maximise your take-home pay.

As well as the tax benefits, paying the majority of your income through dividends means that you're able to pay less National Insurance Contributions (NICs) as these do not apply to dividend payments.

Example - Here's a quick comparison of the difference in take-home pay for a sole trader and a limited company.

Sole Trader Take Home Pay

1. Revenue: £40,000
2. Expenses: £1,000
3. Income tax at 20%: £5,300
4. Class 2 NIC: £158.60
5. Class 4 NIC: £2,655
6. **Take-home pay: £30,886.40

Limited Company Take Home Pay

1. **Revenue: £40,000
2. Expenses: £1,000
3. Corporation tax: £5,741.04
4. Dividend tax at 7.5%: £1,406.92
5. Take-home pay: £ 31,852.04

As you can see, even if you now need to pay corporation tax (limited companies do not pay income tax), you still save £965.64 as a limited company. What's not to like?

3. Separate Legal Entity

A private limited company is a separate legal entity from its owners. This separation means that the company can own property, incur debts, and enter into contracts in its own name. This legal distinction can make it easier to manage the business and can add credibility when dealing with customers and suppliers. It also simplifies the process of selling the business or transferring ownership.

4. Credibility and Professionalism

A limited company or private company gives you an edge when it comes to credibility and professionalism. Limited companies that are registered with Companies House are deemed to have a more prestigious business statues, which can help you get off on the right foot. Clients, suppliers, and investors often perceive limited companies as more stable and reliable compared to sole proprietorships or partnerships. This increased trust can open doors to better business opportunities, easier access to credit, and more favourable terms with suppliers.

In fact, it's not uncommon for more established organisations to specify that they'll only work with limited companies or contractors operating through limited companies, and not sole traders.

5. Easier Access to Capital

Raising capital is generally easier for private limited companies. While limited company directors who aren't keen on lending, can issue shares to attract investors, which can provide much-needed funds for expansion and development. This flexibility in financing can be particularly beneficial for startups and growing businesses that need significant investment to scale their operations.

In addition to being a separate legal entity, as a limited company, you could also be eligible for the following venture capital schemes:

1. Enterprise Investment Scheme (EIS) – A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. To be eligible, you must receive investment within seven years of your first commercial sale. Eligible investments are capped at £5 million per year.‍
2. Seed Enterprise Investment Scheme (SEIS) - A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. This scheme is for companies that have just started, or yet to start trading, and is capped at £150,000

6. Better Professional Status

By setting up as a sole trader, unless you get your business' name trademarked, anybody is free to use the name and you have no alternative to protect it.

However, when your business is registered with Companies House, your business name is trademarked, meaning nobody can use it.

If you think how increasingly important it is to have a unique name in business and to be able to be found easily online, you begin to realise why this is a key factor when deciding to create a limited company.

Aside from that, Limited companies do come across as bigger than they actually are, this is usually good for the image of the business as they can appear to be more professional. This can lead to increased trust and respect, paving the way for stronger business relationships and more lucrative opportunities.

It can even impact the likelihood of attracting clients and investors, sometimes it can go as far as making the difference between getting a bank loan or not - simply because they look more secure.

7. Confidentiality and Privacy

This advantage ensures the protection of business information, including trade secrets and proprietary knowledge. Unlike publicly traded companies, private limited companies have limited disclosure requirements, allowing them to maintain the confidentiality of their operations, finances, and even their office address. This ensures that sensitive information remains secure and only accessible to authorized individuals within the company, enhancing privacy and safeguarding valuable business assets.

Once your company name is registered with Companies House, it is legally protected. This means that your business name can’t be used by other private limited companies, which helps to protect your brand from incidents like brand copying or imitation.

Before you decide on a company name, use the name availability checker on the Companies House website to see if your preferred name is available.

8. Flexibility in Ownership

A transfer of ownership is much easier to complete for private limited companies than it is for a sole trader or public limited companies.  

Should the following circumstances arise:

• You want to transfer the ownership of the business by selling your shares
• You decide to cease trading
• You pass away,

You or your executor will be able to transfer all aspects of the company to someone else easily. This is due to the share structure of limited companies, and how it affects ownership.

If you’re the sole director of a limited company, you’ll likely own all the shares. If a limited company has more than one shareholder, this means that there are several individuals who own parts of the company through their individual shareholding.

Whether you own all or some of the shares in a limited company, it’s relatively straight forward to change the ownership of those shares to someone else.

9. Tax Advantages

When you establish a limited company, you're tapping into some significant tax benefits. Instead of facing income tax rates ranging from 20% to 45% as sole traders do, a limited company typically only deals with a maximum of 25% Corporation Tax on its profits.

Another perk? You can reinvest surplus income back into the business, rather than withdrawing all profits. Also, you can claim limited company expenses to improve your tax efficiency.

As a limited company director, you can claim for things like staff parties, pension contributions, your accountancy fees and many other things you wouldn't be able to add to your self assessment tax returns as an independent trader.

10. Better Income Splits

If you have incorporated limited company by shares, you can easily split income among your spouse or family members. Issuing dividends to your spouse or children, for instance, allows you to leverage their tax-free Personal Allowance, basic tax rate, and the £500 tax-free dividend allowance. This strategy enables you to divide your business profits, thereby reducing personal tax obligations.

Need Professional Advice?

While many business owners will find that the advantages outweighs limited company disadvantages, operating through this structure does come with increased administrative burden. This business structure offers protection, flexibility, and opportunities for growth, making it a popular choice for entrepreneurs and business owners across various industries. By understanding the benefits of a private limited company, you can make informed decisions that lay the foundation for your business's success and longevity. However, choosing the right structure is a nuanced decision, requiring careful consideration of individual business goals. To make well-informed decisions about your business structure, consider the expertise of our small business accountants. Their financial expertise and understanding of regulations can guide you through the complexities. If you decide to sign up, we'll help you set up your limited company at no cost! Book a free consultation with our accountant today!

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