7 Advantages of a Private Limited Company

What is a Private Limited Company?

A private limited company 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.

Why Operate as a Private Limited Company

In the UK, the majority of self-employed people operate as sole traders. While there are many advantages to being a sole trader, you could take home more money and give your business a professional edge by setting up as a limited company and registering company at Companies House (the executive agency of the British Government in charge of incorporating all forms of companies, including a private limited company, in the United Kingdom).

In this article, we'll look at the advantages of operating as a private limited company to see how it could benefit you.

If you're interested in seeing whether a limited company could be a good option for your business, check out our Business Structure guide. If you're already operating as a sole trader, making the jump to a limited company is more straight forward than you think.

7 Benefits of a Private Limited Company

1 - You Pay Less Tax and National Insurance Contributions

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 or private limited company, you typically pay yourself a small salary so you incur as little personal tax as possible. The majority of your income will come in the form of dividends that 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 example

1. Revenue: £40,000
2. Expenses: £1000
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 example

1. **Revenue: £40,000
2. Expenses: £1000
3. Corporation tax: £5741.04
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?

In the UK, the majority of self-employed people operate as sole traders.

While there are many advantages to being a sole trader, you could take home more money, and give your business a professional edge by setting up as a limited company.

2 – Limited Liability: Protecting Your Assets

While many turn to a limited company or private limited company for the income tax benefits, some would argue that the peace of mind that comes with it is just as important.

We all know that risk comes with the territory when you run your own business. However, there are ways to minimise your risk as a self-employed person. With a limited company, you’re protected from any debts the company may incur should your business become insolvent.

Limited companies registered at Companies House are their own legal entities; from a legal standpoint, the individuals that make up these companies are not deemed personally liable (their personal assets are, too) for the debts of the company. Your responsibility for your company’s debt is capped at the number of stock market shares you own in that company.

Example

Imagine you’re running a limited company, and you have a share capital of £2000.

You decide to take out a loan of £5000. 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 £2000.

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.

3 - 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.

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.

4 – Raising Capital: Access to Funding

A limited company or private limited company is a separate legal entity from its directors, which presents less risk to lenders. While sole traders are still able to access funding, they would likely receive higher lending rates.

And while limited company directors who aren't keen on lending have the option of self raising funds through selling company shares, this isn't possible for sole traders. The latter would need to raise funds through their own personal means.

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

5 – Confidentiality and Privacy - Protecting Business Information

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.

6 – Transferability of Shares: 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.

7 – Tax Advantages: Lower Tax Rates

One of the biggest advantages of a private limited company is the lower rate of tax you're liable for(including income tax) - and claiming for all the expenses you’re entitled to is one way 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.

If you're interested in reading more about what private limited companies can claim, we've covered allowable expenses in greater detail in our our limited company expenses guide.

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. From limited liability to tax efficiency and market credibility, this business structure has much to offer. 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! Do check out our accounting packages, or book a free consultation with our accountant.

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