Selecting your business structure is a critical decision all entrepreneurs or business owners make in their careers. The private limited company (PLC) structure offers a compelling package of benefits and is a staple option for those seeking growth potential, liability protection, and a professional edge.
But before you get your business operations up and running, understanding the private limited company advantages will help you decide if this structure is the best fit.
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What is a Private Limited Company?
Private limited companies are a popular choice for businesses in many countries. Their formal structure separates the company's finances and legal standing from its owners (the shareholders). Shareholders in a private limited company enjoy liability protection, unlike a sole trader, who is personally liable for all business debts.
- Type of business entity: A company owned by shareholders with limited liability.
- Registration: Officially registered with Companies House.
- Shares: Ownership is divided into shares, which are not publicly traded.
- Limited Liability: Shareholders' financial responsibility is generally limited to the amount they invested in their shares
Let's explore the key reasons why so many businesses opt for the private limited company structure.
Limited Liability Protection
A private limited company in the UK can reap the advantage of protection to your personal assets. With a PLC, your company becomes a separate legal entity, and your liability as a shareholder is limited to the amount you invested in the company's shares.
This contrasts with sole traders who have no legal distinction between themselves and their business, combining their personal and business finances. This means they are personally responsible for any debts or legal actions, which could put assets like property, vehicles, or other high-value items at risk. This is referred to as personal liability.
Let's use an example to further clarify.
Example: Your private limited company is involved in a costly lawsuit that it loses. The resulting debts exceed the value of the company's assets. Because of limited liability, your personal assets are generally protected. Creditors cannot pursue your house, savings, or other belongings to settle the company's debt.
As a business owner, you're already dealing with significant levels of stress and risk, which makes this crucial protection a token for creating peace of mind. You are armed to take calculated risks without jeopardising your personal assets.
Important note: Limited liability is not absolute, and it's paramount to remember this. In some circumstances, the directors of a PLC may be held personally liable for a company's actions, especially if cases of fraud or wrongful trading are involved. Always consult with a professional for advice and to confirm information before you take serious action.
Find out the Difference Between a Registered Office and Corporate Office.
Increased Credibility and Professionalism
Credibility and professional image are two interdependent factors that influence consumer choice. Can a consumer look at your business and feel safe or confident that you will deliver to expectations? These are two significant factors that Servcorp believe matter for any business structure.
- The "Ltd" Advantage: Registering your business as a private limited company gives you the right to include "Limited" or "Ltd" after your company name. This gives the perception of an established structure in the business world and can't be overlooked.
- Perceived Stability: Your perceived stability, trustworthiness, and financial stability are significantly greater as a PLC in the eyes of potential customers, partners, and investors.
- Attracting Opportunities: A PLC structure can open doors to larger contracts, collaborations, and even funding opportunities that might be less accessible to sole traders.
If you're struggling to visualise the benefits of a private company structure, the following example may help paint a clearer picture:
Example: Imagine you're bidding for a contract with a major corporation. Alongside your proposal, they'll likely consider the legal structure of your business. "Smith Consulting Ltd" may project a more reliable and professional image than simply "Smith Consulting."
Simply put, limited companies have a significant perceived advantage compared to sole traders.
Important note: It's pivotal to back up your "Ltd" designation with great business practices, exceptional customer service, and a proven track record. Or else those three letters will drastically lose their value and won't make a difference as far as credibility is concerned.
Fast Set Up and Low Costs
Setting up a PLC in the UK is remarkably swift and inexpensive, making them an appealing alternative to other business structures. For a cost of £50, the Companies House Register will process a PLC application within 24 hours, turning an idea into an existing business in the blink of an eye.
A business will also receive its certificate of incorporation within this time, undercutting the weeks required for traditional partnership agreements or overseas incorporations.
Rapid set-up and low overheads also create strategic freedom. You can lock in limited liability from day one, open a business bank account quickly, and shift resources toward product development or marketing instead of sunk administrative costs. In short, the PLC structure lets founders get started on their own business faster than other models.
Enhanced Tax Efficiency and Flexibility
Private limited company tax advantages are a commonly Googled query because of their allure. When it comes to taxation, PLCs are often subject to different rules and potentially lower tax rates compared to sole traders.
A company director also has strategic options for withdrawing income, leading to significant tax savings. Simply put, it's remarkably tax-efficient.
- Lower Tax Rates: Generally, the UK offers lower corporation tax to private limited companies as opposed to sole traders.
- Salary and Dividend Options: As a director of a PLC, you have the freedom to choose how you extract earnings from the business. You have the option to receive a salary (which is taxable under income tax and National Insurance Contributions) and distribute dividends based on the company's profits. Dividends are taxed separately at a potentially lower rate compared to income tax.
- Strategic Tax Planning: By combining salary and dividends, you can strategically optimise your tax liability, which may result in substantial savings when compared to operating as a sole trader.
Example: Imagine a moderate salary combined with dividend payments from the company's profit are strategically earned by the director of a PLC. An approach like this can reduce the overall tax burden to a noticeable amount.
Important note: Tax regulations are complex. To maximise the tax benefits of a PLC, it's important to consult with an accountant or tax advisor for personalised guidance
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Easier Access to Capital and Funding
Capital is a vital aspect of any business and all place emphasis on ensuring ease of access to it. Whether a company is expanding or trying to sustain operations, finance is king. And that's where a PLC can tick off another box to claim an advantage.
Compared to a sole trader, PLCs have multiple options for raising funds, which is great for potential expansion and scaling.
- Issuing Shares: Raise capital by selling shares in the company, attracting investors who become part-owners in exchange for their investment.
- Securing Loans: Lenders and banks might consider a PLC a more stable and lower-risk borrower compared to a sole trader, potentially opening doors to better loan terms and amounts.
- Venture Capital: The formal structure and perceived scalability of a PLC can be attractive to venture capitalists seeking to invest in businesses with high growth potential. We mentioned earlier the perceived credibility and professionalism, and once again, it holds true.
- Government Grants: Financial awards provided by government agencies or departments to support businesses and offer critical funding to fuel growth, innovation and development.
- Crowdfunding: Crowdfunding allows PLCs to collect small contributions from many people to fund a specific project, initiative, or venture. These funds are obtained through online platforms such as Kickstarter, Indiegogo, GoFundMe, or similar sites.
- Angel Investing: A form of financing where high-net-worth individuals or groups provide capital to startup companies, typically in exchange for equity.
Example: A successful PLC with a promising new product needs significant funding for manufacturing and marketing. They issue shares to a group of investors which secures the capital needed for rapid growth.
Important note: Access to funding is never guaranteed, and businesses relying on it are setting themselves up for failure. Any investor or lender will evaluate your business plan, financial health, and marketing potential before making any commitment.
Perpetual Succession of a PLC
The sole trader structure intrinsically links the business and the individual. We reiterate this because the sheer advantage of a PLC means the company as a legal entity has a life of its own; that's what perpetual succession is known as.
Even if shareholders leave the business or pass away, the company continues to exist, which safeguards stability and continuity.
Business partnerships, contracts, and clients won't be disrupted by changes in the company's ownership. A PLC is less vulnerable to interruptions caused by the departure of key individuals. This ongoing existence can make a PLC particularly appealing to investors and partners who seek long-term stability.
Example: The founding director of a thriving PLC decides to retire, selling their ownership stake to a new investor. The company seamlessly continues its operations under new leadership, with its core business structure remaining intact.
Important note: While designed for indefinite existence, a PLC can be wound up or dissolved under specific circumstances through formal legal processes.
Transferability of Shares
The flexibility regarding ownership changes is a practical advantage that PLCs are often valued for. Shares can be bought, sold, or gifted with ease, and this transferability enables simple adjustments in ownership as the business evolves.
For example, a founding shareholder wanting to retire can sell their shares to a new investor and business continuity remains unaffected.
In the same way, the business has the ability to draw in fresh funds through the issuance of shares to new investors. Although there are legal procedures to follow when transferring shares (as is the case with any private company), the process is typically simpler compared to transferring ownership of a sole trader business in its entirety.
This adaptability in ownership structure can be quite attractive to investors considering a PLC. Prospective investors frequently seek a straightforward way to divest their investment if necessary, and the ease of transferring shares offers them this opportunity.
Protection of Company Name
Your business name holds substantial value to you, and safeguarding it is an additional benefit in the advantages of a private limited company. Once registered with Companies House, no other UK business entity can operate under the same name. This comes with a few important benefits:
- Brand Protection: Your brand identity heavily relies on your company name. By protecting your name, you ensure the preservation of your distinct position in the market and avoid any potential confusion among customers caused by competitors using a similar name.
- Creating Recognition: A unique and safeguarded name enables you to differentiate yourself and establish a strong brand identity. Your business can be readily recognised by customers and clients, eliminating any possibility of confusion with other entities.
The Process of Forming a PLC
Once you’ve decided to set up your own PLC, there are several steps you need to take before registering your business on Companies House. The current process was legislated in the 2006 Companies Act, which all UK businesses must legally comply with.
1. Choose a Name
One of the earliest decisions your business needs to make is your name, which is your company’s legal identity.
In the UK, there are rules which PLCs must meet in order to register, which includes:
- It must end in ‘Limited’ or ‘Ltd’ (or the Welsh equivalent ‘Cyfyngedig’ or ‘Cyf’.
- Cannot be ‘too similar’ or ‘same as’ an already registered company
- Cannot contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless given proper permission.
You can check the Company Name Availability Checker to see if your name is already taken.
2. Appoint Directors and a Company Secretary
Your PLC must appoint at least one company director, making them legally responsible for running the business.
Company directors have to be over 16, can’t have been previously disqualified from being a director, and have to provide a service address.
While a company secretary is optional for PLCs, a new business owner may feel it suitable to appoint one who can take on the responsibilities of a director.
Note: The personal information of directors, such as name, occupation, date of birth, and nationality, is publicly listed on Companies House.
3. Appoint Shareholders and Guarantors
Since most PLCs are ‘limited by shares’, new companies must have at least one shareholder who can or cannot be a director.
You’ll need to develop a ‘Statement of Capital’ which includes the names and addresses of all shareholders.
In the UK, a company is required to appoint at least one guarantor, who typically does not receive business profits but instead promises to pay a specified amount to the company if it is unable to fulfil its debts.
4. Identify Persons of Significant Control (PSCs)
A PSC is someone who holds more than 25% of shares and/or voting rights in the company.
They may also be an employee or director who has a significant interest through other means in decision-making processes.
All PLCs must develop a register of PSCs for reporting purposes.
5. Complete Necessary Documentation
An essential part of registering your PLC is completing the following necessary documentation:
- The ‘memorandum of association’: The legal statement signed by directors and guarantors agreeing to form the company
- The ‘articles of association’: The written rules as agreed upon by guarantors and directors.
Your PLC can’t make any changes to the ‘memorandum of association’ once registered, so your business must get it right the first time.
6. Set up Company and Accounting Records
Business records are time-consuming but essential for all UK PLCs as they are a legal requirement as outlined by the Companies Act.
All limited companies need to keep the following records for up to 6 years:
- Accounting records including invoices, receipts, and bank statements
- Financial reporting statements outlining cash flow, revenue, and income.
- Registers of all directors and company members
- Company constitution documents
- Records of property, contracts, and debts
The specific records required may vary depending on the size and nature of the company. It is important to consult with a professional advisor to ensure compliance with all applicable laws and regulations.
7. Register Your PLC
Finally, your PLC must be officially registered through Companies House, which can be done online, by post, or through a third-party agent. Registration costs £50 and requires at least three pieces of personal information about yourself and your directors and guarantors.
As part of this process, your business will need to list your company address, which will be publicly listed on HMRC and Companies House as your legal registered address.
Your limited company will also be registered for Corporation Tax, which needs to be done within 3 months of your company’s establishment.
Once completed, your business will receive your standard industrial classification (SIC) code and certificate of incorporation, confirming the company’s existence legally.
For more information on registering a PLC, check out the Companies House website.
Is a Private Limited Company Right for You?
Your business structure in the UK holds great importance.
A private limited company offers a compelling array of advantages that can support your vision for growth, stability, and financial efficiency. Its potential for limited liability, tax benefits, enhanced credibility, and access to funding make it a popular choice for businesses of various sizes.
If you're considering incorporating your business as a PLC, seeking professional advice from an accountant or solicitor is always wise. They can guide you through the setup process, explain any potential tax implications, and ensure you make the best decision for your specific business needs.
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