What is a private limited company?

Setting up a private limited company is a common approach if you want to begin a business. Here, you will discover the steps involved in founding a limited company, how it runs, and the laws it must follow to determine if it is the correct business structure for you.

Many new businesses opt for a private limited company since in contrast to working as a sole trader or in a partnership, a limited company is a separate legal entity.

A private limited company is structured differently and has more complicated needs, such as distinct tax and legal duties, however, it is quite similar to LLCs (Limited Liability Companies), since it protects its members from personal liability for the debts and obligations of the business.

What is a private limited company?

A private limited company is the most popular form of company entity in the United Kingdom. You can set it up immediately through the registration of the company with Companies House. It acts independently of its directors and shareholders as a legal entity, therefore this means that the company owns all of its assets, obligations, and earnings, and the shareholders are not entirely liable for the firm's debts.

What are the advantages of setting up a limited company?

• Limited liability — because you as the company owners are not legally obligated to pay company debts in excess of the value of the shares you own, this protects your personal assets (such as their house or savings) in the event of a business failure.
   
• Professional status — setting up a limited company makes you appear more professional than an unincorporated sole trader. This is owing to the open character of business accounts, which must be made public along with the names of directors and individuals of important influence; however, other companies are more trusting of limited liability companies (LLCs).
   
• Tax-efficient income — within legal constraints, having a limited company can be a tax-efficient way to pay oneself. You as directors and company owners can pay yourselves through a PAYE wage and then supplement this with shareholder dividends once corporation tax is paid. Dividends paid are not liable to NICs since corporation tax has been paid on earnings.
   
• Protect your business name — when you incorporate your business, its name is protected, and other businesses are prohibited from running under the same or a similar name.
   
• Capital raising — you can increase your capital by selling shares in your limited company in order to invest and expand your business. The good news is that investors are also safeguarded against the company collapsing, with their risk limited to the value of their shares.
   
• Conducting business with other businesses — Simply put, most bigger organizations will not do business with unincorporated businesses such as sole traders, which means you may need to function as a limited company in order to supply products and services to other businesses.

What are the disadvantages of a limited company?

• Legal obligations – running a private limited company presents you with several requirements which include filing annual accounts and reports with Companies House, submitting a corporation tax return to HMRC, setting up and operating PAYE and payroll, and submitting quarterly VAT returns to HMRC. If you miss a deadline or fail to make a payment on money owed to HMRC, your company may face large penalties.
   
• Receiving payment — in comparison to a sole trader, who may withdraw cash from their business without limitation, withdrawing funds from a limited company can prove to be more cumbersome. As an owner or director, the business must legally pay you money in the form of a salary or dividend payment, which implies you cannot utilize the business as a source of personal income. Even if you pay yourself as a director and operate a monthly payroll to draw a salary, you will need to register for PAYE with HMRC.
   
• Setup and dissolution — establishing a limited company is uncomplicated, but you will need to register with Companies House, notify HMRC, and pay annual costs. If you intend to close a limited company, you must file a dissolution business, which can take up to three months.
   
• Tax, profit, and loss for a private limited company — As a private limited company, you must register with HMRC and pay corporation tax on any profits earned during the financial year – this is in addition to any income tax and National Insurance contributions (NICs) that employees and directors are required to pay. Furthermore, you may also be required to pay dividends to shareholders, which are taxed as income but are exempt from national tax contributions. Finally, your payments to employees should be done through PAYE, and the company must also pay National Insurance Contributions to HMRC as part of the employee's income.

Who can run a limited company?

In running Private limited corporations', you, the owners, are referred to as shareholders, and each owns a specified number of shares in the business. This implies you may either set a limited company on your own – in which case you would own 100% of the shares – or with others, dividing the available shares among the shareholders.

You may have Directors – sometimes known as company officials – who are responsible for the management of limited liability companies and may also be shareholders. A limited company must have at least one director, and the majority of company owners are also directors - this means that you can own and operate a limited company independently or in collaboration with others.

To become a shareholder, you must acquire one or more of the company's shares, which are issued when the business is formed and each share represents an equal proportion of the business.

Additional shares may be established and issued once the business is incorporated, and the more shares you possess, the greater your percentage business.

Conclusion

Choosing a private limited company as your legal structure involves thorough consideration of the benefits and drawbacks and their impact on your economic objectives. Nevertheless, before registration as a private limited company, it is prudent to consult with a Company Law Solicitor who can advise you on your alternatives.