Setting up a private limited company – Advantages and Disadvantages

A private limited company, often referred to as a “Ltd” in the United Kingdom, is a popular business structure known for its unique legal and financial characteristics. In this context, the term “private” denotes that the company’s shares are not publicly traded on stock exchanges; instead, they are privately owned by a select group of individuals or entities.

One of the primary advantages of establishing a private limited company in the UK is the limited liability it affords to its shareholders. 

However, this legal structure comes with its own set of disadvantages. The regulations and compliance requirements for private limited companies can be complex, involving detailed financial reporting, corporate governance, and taxation considerations. 

Furthermore, the restrictions on selling shares can limit the ability to raise capital compared to publicly traded companies.

In this article, we will explore the advantages and disadvantages of setting up a private limited company in the UK, helping you make an informed decision about the most suitable business structure for your entrepreneurial endeavours.

How to set up a private limited company

Setting up a private limited company involves several steps and legal requirements. Here’s an overview:

• Company Name: Choose a distinctive and legally acceptable company name. Ensure it is not already in use and follows naming regulations specified by Companies House.
• Registered Office: Designate a registered office address within the UK where official documents, including legal and tax correspondence, will be sent. This must be a physical address, not a P.O. Box.
• Directors & Shareholders: Appoint at least one director who will oversee the company’s operations. Directors can also be shareholders. Shareholders are the company’s owners and invest in the business. There’s no strict limit on the number of shareholders, and they can be individuals or corporate entities.
• Articles & Memorandum: Prepare these internal documents. The memorandum states the shareholders’ intention to establish the company, and the articles outline the company’s internal rules and management structure.
• Company Secretary: While it’s no longer mandatory for private limited companies, you can appoint a company secretary to handle administrative tasks and assist with compliance.
• Share Capital: Declare the initial share capital, which is the total value of the company’s shares. It can be as low as £1, and each share can have a nominal value (e.g., £0.01 per share).
• Register with Companies House: Complete the company registration process with Companies House, the UK’s registrar of companies. This can be done online, and it’s a crucial step to make your company legally recognised.
• Taxation: Register for Corporation Tax with HM Revenue and Customs (HMRC). Depending on your business activities, you may need to register for other taxes such as Value Added Tax (VAT) or Pay As You Earn (PAYE) if you have employees.
• Bank Account: Open a dedicated business bank account in the company’s name. This account will be used for managing financial transactions, including receiving payments and making payments for business expenses.
• Compliance: Be prepared for ongoing compliance responsibilities, including annual filings, financial reporting, and adhering to various regulations applicable to your business activities. Ensure you meet all statutory obligations to maintain your company’s legal status.

This detailed breakdown of the ten key steps provides a clearer understanding of the essential requirements and processes involved in establishing a private limited company in the UK. 

It’s important to consult with professionals or refer to official resources for specific guidance and to stay up to date with any legal or regulatory changes.

How to register a limited company 

To register a limited company in the UK, you can choose between online registration and postal submission using the IN01 form. If your company name doesn’t include ‘limited,’ postal registration is mandatory. The method you choose has a significant impact on the registration timeline.

Opting for online registration is the faster route. Companies House typically processes online applications within 24 hours of receipt, making it the preferred choice for those looking to kickstart their business promptly.

On the other hand, postal registrations take longer to process, often up to 10 days. This method may be suitable, especially if your company name excludes ‘limited.’ However, it’s essential to factor in the extended registration time when planning your business activities.

After successfully registering your company, you’ll receive a ten-digit Unique Taxpayer Reference (UTR) at your registered address within a few days. This UTR is crucial for tax-related purposes and should be securely retained.

Additionally, you’ll be issued a ‘certificate of incorporation,’ confirming your company’s legal existence. This certificate includes vital details such as the company number and the formation date, making it a critical document for various business transactions. Ensure that it is safely stored for future reference.

Companies House Authentication Code: 

Companies House send this code in post to the registered office address. The Companies House authentication code is a critical security measure that ensures the integrity of the information filed with Companies House. It plays a vital role in maintaining accurate company records, complying with legal requirements, and safeguarding against unauthorised access or changes.

Advantages of setting up a private limited company 

Here are the advantages of setting up a private limited company in the UK:

• Limited Liability: Limited liability protection is one of the primary advantages. Shareholders’ personal assets are generally safeguarded, and their liability is limited to the value of their shares. This separation of personal and business assets offers financial security to the owners.
• Credibility and Trust: Private limited companies often carry a higher level of credibility and trust in business dealings. Suppliers, clients, and partners may prefer to work with registered companies, as they signify a formal and regulated structure.
• Tax Efficiency: Private limited companies can benefit from tax efficiency. They have more flexibility in managing their tax affairs, including options for tax planning, dividend payments, and deductions, potentially reducing their overall tax liability.
• Access to Funding: Private limited companies have multiple avenues for raising capital. They can issue shares, secure loans, or seek investment from venture capitalists or angel investors, making it easier to access financial resources for business growth.
• Business Continuity: The structure of a private limited company ensures continuity of the business, even in the event of changes in ownership or management. The company can continue to exist and operate smoothly without significant disruption.
• Ownership Control: Shareholders retain control over the company. The ability to issue different classes of shares allows for the distribution of voting rights and dividends as per the company’s policies and the shareholders’ agreements.
• Transferability of Shares: The shares of a private limited company are often transferable, making it relatively easy to bring in new investors, transfer ownership, or sell the business. This flexibility can enhance the company’s marketability.
• Limited Formality: While there are legal obligations, private limited companies have fewer formalities compared to public companies. This can reduce administrative burdens and allow the company to focus on its core operations.
• Asset Protection: Assets held by the company are protected. In case of financial troubles or legal issues, creditors generally cannot access the personal assets of shareholders. This protection provides a safety net for business owners.

In summary, setting up a private limited company in the UK offers numerous advantages, including limited liability, tax efficiency, credibility, access to capital, and control over ownership. 

These benefits make it an attractive choice for entrepreneurs and businesses seeking a structured and secure business framework. 

Disadvantages of setting up a private limited company 

Here are the disadvantages of setting up a private limited company in the UK:

• Compliance and Regulation: Private limited companies must adhere to complex regulatory and compliance requirements, including annual filings, financial reporting, and corporate governance, which can be time-consuming and costly.
• Administrative Burden: Managing a private limited company entails considerable administrative tasks, including maintaining company records, filing annual returns, and adhering to tax deadlines.
• Cost of Formation: The initial setup costs, including registration fees, legal and accounting fees, and the requirement to have a registered office address, can be relatively high.
• Ownership and Control: The control over the company can become fragmented if there are numerous shareholders with differing views and interests, potentially leading to conflicts.

It’s important to consider these disadvantages alongside the advantages when deciding on the most appropriate business structure, as they can impact the operational and financial aspects of a private limited company.

How can Heighten Accountants help you with you private limited company

Following a successful company formation, our services go beyond compliance, encompassing essential tasks such as bookkeeping, statutory accounts, payroll, VAT return, payment run, and purchase ledger. Beyond meeting legal and regulatory obligations, we also provide strategic financial guidance that plays a pivotal role in enhancing the overall success and financial well-being of your private limited company.