A private limited company (LTD) is a form of privately held small business entity. Private limited companies are subject to specific rules and regulations which can provide advantages for small business owners, for this reason they are among the most popular types of company incorporation and the most requested incorporation service in the UK.
Unlike sole traders or partnerships, the owners of limited companies need not necessarily personally involve themselves in the running of the business, unless they are elected as a director. Private limited companies also differ from sole proprietorship companies as no single individual is personally responsible for the company’s business depts or essential to its continued existence. Likewise, private limited companies differ from public companies as their shares cannot be publicly traded on the stock exchange.
Business owners and individuals looking to start up a company should consider registering as a private limited company, as well as considering alternative options such as
Features of a private limited company – advantages and disadvantages:
Private limited companies are subject to a number of unique features which can benefit the business owner. These include:
- Limited Liability: In private limited companies, the maximum number of shareholders is capped at 50. Shareholders also benefit from limited liability. Limited liability means that the financial liability of shareholders is limited to their shares. This limitation reduces the risk for shareholders. In circumstances where, for example, the business had to close due to financial struggles, the private assets of shareholders would not be at risk. The exception to limited liability is instances where a shareholder commits fraud related to the private limited company, in which case their protection is negated.
- Tax advantages: Private limited companies benefit from tax breaks, such as having lower corporate taxes than other business types.
- Company name protection and credibility. The establishment of a business as a private limited company protects the name of the company, ensuring it belongs to the solely to the business and cannot be used by others. Being listed as a private limited company by Company House also provides credibility for the company, enhancing a professional company image as well as client and investor trust.
- Guaranteed company succession: Private limited companies qualify as incorporate, meaning that they are an independent legal entity responsible for its’ own debts and assets. This not only reduces the owners’ liability, it also assures the perpetual succession of the company and its’ continued existence even in instances of death or departure of the owner.
- Can be set up via one or multiple individuals: Unlike other types of company incorporation, a private limited company can be established either by one individual or by multiple people, making it a viable for a number of different types of business, circumstances and individuals.
- Restrictions on trading shares: Private limited companies cannot have their shares publicly traded. This stops shareholders from selling their shares to outside buyers, and necessitates all shareholders agreeing to the sale or transfer of shares, greatly reducing the risk of a hostile takeover.
- Complexity of accounting and taxation: The system of taxation for private limited companies differs from other types of company. For example, private limited companies must file their financial statements no later than nine months after the end of the last fiscal year. Newly registered businesses start their first accounting period on the day that the business becomes incorporated and accurate records must be kept from the outset in order to access the tax advantages of a privately listed company. The more complicated set of requirements for the accounting and tax of a private limited company, including additional reporting and filing, could potentially lead to higher admin and accountancy costs.
- Lack of company privacy. The details and information of a private limited company, including details of people with significant control (PSCs), the owners and directors, are disclosed on public record.
- Restrictions on publicly trading shares: Although the inability to publicly trade shares offers many protections for the company shareholders and the business, it reduces a shareholders’ options for liquidating their shares. Depending on the business goals of individual shareholders and the business owner, this could be a disadvantage.
Weighing up the potential positive and negative elements of registering as a private listed company, many business owners find it offers the best future for their company. To ensure whether your business meets the criteria, and that it is the right route for your company, you should seek legal advice.
Setting up a private limited company:
Setting up a private limited company requires the business owner to provide specific information including:
- A company name which is inoffensive, unique (not being used by another company), and ends with either “Ltd” or “Limited” (unless it is a charity). The Companies House Register is the best place to check whether a name is already in use.
To know the company’ SIC code.
- A registered company address. This must be a physical address and is where the communication from Companies House will be sent. It will also be a publicly available information via the register when the company becomes incorporated.
- The name and address of at least one company director. In private limited companies, the business owner may elect themselves as the sole director, one of a number of directors, or elect one or more directors but not act as a director themselves. Information regarding the company director or directors will be made public except in cases where the directors’ safety may be at risk from divulging their address.
- A statement of capital, detailing the number and value of shares, as well as the details of the shareholders (name and address). With private limited companies, the business owner can be the sole director and sole shareholder with 100% of the shares. Alternatively, there may be more than one director or share-holder, in which case the value and amount of each share must be detailed.
- A memorandum of association signed by all initial shareholders. This is a legal statement confirming that all the shareholders have agreed to form the company.
- Articles of association which detail the shareholders, directors and, if applicable, company secretary’s, agreed upon rules for running the company. Standard articles, known as model articles, are available on the government website and make it possible to register online, but may be too vague for specific companies.
Utilising this information, the future business owner must register the business with Companies House. Registration can take place online, via post, or through a third party like an agent.
Registering by post requires the business owner to download and fill out an IN01 form and pay £40 via cheque to Companies House. The postal application process usually takes between 8 to 10 days and the application must be sent to the address on the form. Same day registration is possible at a cost of £100 if the application is received by Companies House before 3pm and the envelope is marked with “same day service” on its’ top left-hand corner.
Online registration only costs £12, is payable by card or through PayPal, and can take as little as 24 hours to complete. However online registration is only possible if the company has used model articles for its articles of association.
Using an agent or third-party software can simplify the process and ensure everything is correct, but generally comes at an additional cost.
Post registration responsibilities:
Once a business has been incorporated by Companies House and is a registered business, the business owner must register the company for Corporation Tax within 3 months of starting to do business. Starting business includes buying or selling, renting a business premises, employing staff or workers, and advertising. Registering late can result in penalties and fines.
Another obvious duty for owners of private limited companies is to pay Corporation Tax. Once a company is registered for Corporation Tax HMRC will inform the owner of the deadline for payment. Businesses must also file a Company Tax return, regardless if the business made profit, loss, or has no Corporation Tax to pay.
Private limited companies are still subject to UK law, in particular the Companies Act 2006, and operate within the legal business structure. Fair payment of employees, paying tax, and other elements of business operation must all meet legal requirements.
When to seek legal advice:
Registering a private limited company can vastly improve your chances of business success. However, whether it is the most beneficial choice for your company will depend on your circumstances and business goals. There are a number benefits to establishing a private limited company, but the process of registration and the ongoing responsibilities of running such a business are complex. Late submission of documents, submitting incorrect information, or failing to fulfil certain criteria can result in fines, penalties and legal ramifications. To ensure you successfully establish a private limited company, and that it is the best option for your business, you should seek legal advice at the earliest possible opportunity.