10 Disadvantages of a Private Limited Company

Are you planning to start or grow your small business? You have multiple options to choose from like a sole trader, public limited company, business partnership, or private limited company. There's no one-size-fits-all solution for small business owners, so it's important to evaluate the pros and cons of each business structure before deciding on the right fit.

Private Limited Companies, while popular, come with their fair share of drawbacks. In this article, we will explore the disadvantages of a private limited company that entrepreneurs and business owners should consider. Understanding these challenges is crucial for making informed decisions and mitigating potential risks.

While Private Limited Companies advantages are many, such as limited liability and flexibility, it is equally important to understand and address the potential private limited company disadvantages. Identifying and analyzing these disadvantages can help entrepreneurs make informed decisions and take appropriate measures to mitigate risks.

By Chris Andreou

Updated:

February 2, 2024

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limited company disadvantages
limited company disadvantages

What is a Private Limited Company?

A Private Limited Company is a legal business entity formed by a group of individuals or shareholders. It offers limited liability protection to its owners and restricts the transferability of shares to a predetermined group. This structure is often preferred for its benefits but is not without its drawbacks.

What are the Disadvantages of a Private Limited Company?

Entrepreneurs have several business structures to choose from when starting a business, including sole proprietorships, partnerships, and private limited companies. Each structure has advantages and disadvantages; choosing the right one is crucial to the business's success.

In the UK, private limited companies are a popular business structure for entrepreneurs and small business owners. This model offers several advantages, including limited liability protection, tax benefits, and raising capital through issuing shares. However, there are also drawbacks to operating as a private limited company, and it's important to understand them before making a decision.

10 Disadvantages of Private Limited Company

1 – Registration with Companies House

One of the main cons of running a private limited company is the requirement to be incorporated with Companies House. Companies House is the official government body responsible for maintaining a register of incorporated businesses in the UK. While the registration process itself is straightforward and this is also an advantage in legal protection, it imposes certain obligations and drawbacks on Private Limited Companies.

Firstly, company registration or incorporation is not free, and there is a fee involved. Additionally, once you’ve registered with Companies House, the company information such as its registered address, directors, shareholders, and annual financial statements is disclosed publicly. This information becomes publicly available and can be accessed by anyone, including competitors and potential business partners. This lack of privacy may be a significant drawback for some business owners.

There's a way of getting around this. When you sign up for our accountancy package, you’ll be able to use our virtual office as your registered office/ business address, thereby keeping your residential address off the public record. Your name and company accounts will still be visible on the public records, but other personal information will remain private.

Setting up a limited company is slightly more complicated than setting up as a sole trader.

You'll have to:

  • Register the company through Companies House, and provide them with all the information they need
  • Come up with a suitable company name. The name must not be in use presently elsewhere
  • Pay an administrative fee to Companies House to set up the company

These are all relatively small tasks (it’ll only take you a few hours), so it’s not a huge drawback by any means - but the process is decidedly more time-consuming than registering as self-employed.

2 – Administrative Burden

Administrative burden refers to the extensive paperwork, record-keeping, and compliance requirements that come with operating this type of business structure. These companies are expected to keep detailed records of their business, including regular financial reporting, tax filings, maintaining shareholder records, taking minutes during meetings and making notes of any decisions made by directors or other senior staff. Failing to keep up with these administrative requirements can result in legal penalties.

The process of registration and ongoing compliance can be time-consuming and may involve administrative burdens, especially for small businesses or startups with limited resources. It may require engaging professional services such as limited company accountants or company secretaries to ensure compliance with the regulations.

Optimising your income tax through dividends can be complex, and is more complicated than completing your Self Assessment tax return (as a sole trader). You'll need to have a good understanding of accounting, and set aside a significant amount of time to manage your taxes and business finances.

3 – Complex Accounts

The accounts of a limited company are more complex than those of other business models. As the company director, you must keep accurate monthly records of tax returns, expenses, and other financials. This paperwork can prove challenging to keep in order and may require the services of an accountant. Maintaining accurate and comprehensive financial records can become challenging as the company grows and engages in more complex financial transactions.

Preparing complex accounts involves various tasks, including recording financial transactions, classifying and categorizing expenses and revenues, reconciling bank statements, calculating depreciation, and ensuring compliance with tax laws. It requires a thorough understanding of accounting principles and practices.

While skilled accountants can take the stress of maintaining business records off your shoulders, which adds to the financial burden.

4 – Shared Ownership

In this business structure, ownership is divided among multiple shareholders, each holding a different number of shares of the company. Most private limited companies have both directors and shareholders. These shareholders have direct input into how the business is operated, and the more shares they own, the more input they have.

While shared ownership can offer benefits such as pooling resources and expertise, it also comes with certain drawbacks.

  1. Decision-Making Challenges: With shared ownership, decision-making can become complex and time-consuming. Disagreements and differing opinions among shareholders may arise, leading to delays in crucial decision-making processes. Unresolved conflicts can hinder the company's ability to respond quickly to market changes or take advantage of emerging opportunities.
  2. Lack of Control: In a Private Limited Company, no single shareholder may have complete control over the business. The decision-making power is often distributed based on the percentage of shares held by each shareholder. This can lead to a dilution of control and potentially result in conflicts or power struggles among shareholders.
  3. Potential for Disagreements: Shared ownership increases the likelihood of conflicts and disagreements among shareholders. Differences in goals, visions, or management styles can create friction, making it challenging to achieve consensus on important matters. Resolving disputes may require negotiation, mediation, or legal intervention, adding further complexities and costs.
  4. Compromised Decision Autonomy: Shareholders in a Private Limited Company may need to make compromises and align their interests to make collective decisions. This can limit the autonomy of individual shareholders and their ability to pursue their own strategic objectives.
  5. Transferability Limitations: Private Limited Companies often impose restrictions on the transferability of shares. Shareholders may face limitations or require the approval of other shareholders before selling or transferring their shares. This can restrict liquidity and make it challenging for shareholders to exit the company or realize their investment.

This can lead to shared decision-making and less ownership over your own business. While sharing authority may not bother some business owners, those who prefer to make their own decisions may find this model less appealing.

5 - Limited Stock Exchange Access

Unlike publicly traded companies, Private Limited Companies have limitations when it comes to listing their shares on stock exchanges.

  1. Restricted Access to Capital Markets: Private limited companies have the maximum number of shareholders, which limits their ability to offer shares to the public or trade them on stock exchanges, limiting their ability to attract a wide range of investors and raise substantial capital. This restricted access to stock exchange markets can make it challenging for private limited companies to raise capital compared to other business models.  
  2. Limited Liquidity for Shareholders: Shareholders in a Private Limited Company often face limited liquidity options. Selling or transferring shares can be more challenging compared to publicly traded companies. There may be restrictions on the transferability of shares, requiring the approval of other shareholders or compliance with specific procedures.
  3. Limited Valuation and Marketability: Private Limited Company shares lack the regular valuation and marketability associated with publicly traded stocks. The absence of a public market for the company's shares can make it challenging to determine their fair value and negotiate transactions. This can impact the company's ability to use its shares as currency for acquisitions or attracting key talent through stock-based compensation.
  4. Reduced Visibility and Brand Recognition: Publicly traded companies often enjoy higher visibility and brand recognition due to their listing on stock exchanges. Private Limited Companies, on the other hand, may have limited exposure to potential customers, partners, and stakeholders. This can impact the company's ability to build a strong brand presence and compete effectively in the market.

6 - Lack of Flexibility

Private limited companies are less flexible than other business structures, such as sole proprietorships and partnerships. They have to comply with a set of rules and regulations to operate. It is necessary to file documents such as annual returns, financial statements, and annual accounts with Companies House on time. Failure to do so can lead to penalties, and in the worst-case scenario, the company could be struck off the register.

7 - Difficulty Raising Capital

One of the drawbacks of a private limited company is that it can be challenging to raise capital compared to a public limited company. This is because shares cannot be sold to the general public, and private limited companies have restrictions on how they can issue shares. This may limit the amount of capital raised to expand the business.

8 - Personal Financial Liability

Although limited liability is a significant advantage of a private limited company, it does not protect directors from all types of liability.

  1. Personal Guarantees: Financial institutions and lenders may require personal guarantees from shareholders, especially when providing loans or credit facilities to the company. Personal guarantees make shareholders individually liable for repayment in the event the company fails to meet its financial obligations.
  2. Failure to Meet Legal Obligations: If a Private Limited Company fails to fulfill its legal obligations, such as filing annual returns, paying taxes, or complying with regulatory requirements, shareholders may face personal liability. Regulatory authorities or creditors can hold shareholders responsible for the company's non-compliance and seek to recover debts or penalties from their personal assets.
  3. Improper Capitalization: Insufficient capitalization or commingling personal and business funds can expose shareholders to personal financial liability. If the company faces financial difficulties or bankruptcy, creditors may argue that the shareholders did not maintain proper separation between personal and company finances, making them personally liable for the company's debts.

9 - Company Directors Face Greater Scrutiny

Directors of private limited companies have a greater responsibility to comply with laws and regulations, and they are subject to greater scrutiny than other business structures. Private limited companies are subject to more rigorous rules and regulations than sole proprietorships or partnerships. Directors must adhere to laws on financial reporting, taxation, and other legal requirements.

10 - Management of the Company

Managing a private limited company is typically more complicated than other business structures, as there is a separation between ownership and management. This can lead to a conflict of interest between shareholders and directors, especially if they have different ideas on how the company should be run. In such cases, it is essential to have a clear governance structure in place to ensure that everyone's interests are protected.

These factors can make private limited company ownership less attractive to some entrepreneurs. However, it is important to note that the advantages of a private limited company, such as limited liability and the ability to raise capital, may outweigh the disadvantages for many business owners.

You can learn more about this in our guide on the different types of business structures, or reach out to our GoForma accountants by booking a free consultation.

Need Professional Advice?

Handling the complexities of a private limited company in the UK requires careful consideration of both its advantages and disadvantages. While the disadvantages exist, it's essential to note that the choice of business structure depends on various factors. Seeking advice from small business accountants can be helpful in understanding these challenges. They not only ensure that you meet all compliance requirements and handle the necessary paperwork but also help optimize your financial strategies. From managing tax obligations to offering insights for better financial decision-making, these professionals bring expertise to the table. They can help you choose the best structure tailored to your business needs, ensuring a smoother journey.

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