A private limited company is one of the most popular business structures in the UK. In this guide, we'll explain exactly what a private limited company is, explore its pros and cons, and walk you through the steps to set one up effectively.
Private limited company meaning
In legal terms, a private limited company is a separate legal entity from its owners (also known as shareholders). This separation means that the personal assets of shareholders are generally protected if the business incurs debts or faces legal claims. Liability is typically limited to the amount unpaid on their shares or a specific guarantee amount in certain types of companies.
💡Editor's insight: "You may have heard the term limited liability before. This just means shareholders are only liable for the amount invested in a company. What does that mean? In simple terms, an investor only loses the initial stake if a company goes under."
A private limited company must be registered with Companies House, the UK’s official registrar of companies. Once registered, it receives a company registration number (CRN) and must adhere to corporate governance rules. For example, filing annual financial statements and maintaining records.
Types of private limited companies
There are two primary types of private limited companies in the UK:
Private company limited by shares (Ltd)
A private company limited by shares is the most common structure. For this business type, the liability of each shareholder is limited to the value of the shares they hold.
Example: If a shareholder owns shares worth £1,000, their financial risk is limited to that amount.
Characteristics:
Shareholders are owners of the company.
Shares cannot be sold to the general public.
Profits are typically distributed as dividends to shareholders.
💡Editor's insight: "Dividends are just a share of the profits which are paid to shareholders. A company can only make a dividend payment if it is profitable."
Private company limited by guarantee
A private company limited by guarantee is often used by non-profit organisations, charities, or clubs. Instead of shareholders, there are members who agree to contribute a set amount if the company is wound up.
Example: A member may guarantee £10 or £100 if the organisation faces insolvency.
Characteristics:
Members do not own shares or receive dividends.
This structure is designed to reinvest profits into the business's mission rather than distribute them.
Who can set up a private limited company?
In the UK, anyone over the age of 16 can set up a private limited company. Unlike some business structures, there is no requirement for a minimum capital investment. However, directors must meet certain legal obligations, such as not being disqualified due to past directorship issues or insolvency.
What do you need to set one up?
To establish a private limited company, you’ll need the following:
A unique company name: Check its availability on the Companies House database.
A registered office address: This must be a physical address in the UK.
At least one director: A director is legally responsible for running the company.
At least one shareholder or guarantor: They can be the same person as the director.
A memorandum and articles of association: A memorandum and articles of association are documents that outline how the company operates.
A standard industrial classification (SIC) code: This identifies the company’s business activities.
Company registration with Companies House: The online process costs £50, and by post is £71.
Top three advantages of a private limited company
1. Limited liability protection
The most significant advantage of a private limited company is that it offers limited liability to its shareholders or guarantors. In the event of financial difficulties or legal claims, the personal assets of the owners are protected. For example, if a business accumulates significant debt, shareholders are only liable up to the value of their shares (which could be as low as £1). This feature reduces personal financial risk, making the structure more secure than operating as a sole trader.
Example scenario: If a sole trader faces a large legal claim, their home and savings could be at risk. In contrast, a director of a private limited company would typically only risk their investment in shares.
2. Enhanced credibility and professionalism
Many clients and suppliers prefer working with incorporated companies because they are seen as more established. A company with 'Ltd' or 'Limited' in its name can carry more weight in business dealings. The perception can make it easier to access funding, attract partnerships, and negotiate contracts.
3. Tax planning and efficiency
Private limited companies are subject to corporation tax, which can be more favourable than paying personal income tax on all earnings as a sole trader. Directors often combine a modest salary with dividend payments, which can significantly reduce their overall tax liability. The use of allowances, reliefs, and careful planning enables owners to optimise their tax strategy effectively.
Top three disadvantages of a private limited company
1. Administrative responsibilities
Private limited companies face stricter regulatory requirements than sole traders. This includes submitting detailed financial accounts, maintaining statutory registers, and filing a confirmation statement annually. Directors must also adhere to corporate governance rules, which can be complex and time-consuming.
Potential penalties: Failure to meet these obligations can result in fines or even legal action from Companies House or HMRC.
Example of administrative tasks: Companies need to keep detailed minutes of board meetings, issue share certificates, and record any changes to directors or share capital.
2. Public disclosure of information
Unlike sole traders, private limited companies must disclose certain information about their operations. The names of directors and shareholders, registered office address, and financial performance are made public via Companies House records.
Privacy concerns: For business owners who value discretion, having sensitive business information available online can be a drawback. Competitors, clients, and others can also access financial statements and other filings.
3. Complexity in profit distribution
Directors of a private limited company cannot simply withdraw profits as needed, like sole traders can. There are specific rules governing salary and dividend payments. Dividends can only be issued from profits after tax, and improper payments can lead to tax issues or breaches of corporate law.
Example scenario: Directors must carefully document dividend declarations and ensure that there are sufficient distributable reserves to cover them. Missteps in this area can trigger investigations from HMRC or other regulatory bodies.
Examples of private limited companies
Private limited companies are the most common form of incorporated business structure in the UK. Here are some real-world examples and scenarios:
Small family businesses
Many small and medium-sized enterprises (SMEs) choose to structure themselves as private limited companies. For instance, a local bakery, landscaping service, or construction firm may register as an Ltd to limit personal liability while maintaining family ownership and control. The business can issue shares to family members, who become shareholders, without offering them publicly on the stock exchange.
Professional service providers
Independent professionals, including accountants, lawyers, and consulting firms, often set up private limited companies to provide services to their clients. By registering as a private limited company, these businesses also appear more established and professional to potential clients.
Tech start-ups and innovation-driven companies
Many technology start-ups begin as private limited companies. For example, a software development company might rgister as an Ltd to secure investment from private investors. This structure allows start-ups to raise capital through private share issuance without going public.
Final thoughts
A private limited company structure offers a balance between liability protection and professional credibility. However, the added administration mean it’s essential to weigh the pros and cons carefully. Understanding your specific business needs and consulting with legal or financial professionals can help ensure you make the right choice. If you need legal help for your business, we're here to help. Get in touch to see how our small business solicitors can help today.
References
Limited company formation from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.