The Advantages of a Private Limited Company: Your Guide to Success

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 opt for it, understanding the private limited company advantages will help you decide if this structure is the best fit for your business.

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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 share

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. Unfortunately, sole traders have zero separation between them and their business, meaning any debts or legal actions incurred will result in personal assets at risk. This could be in the form of properties, cars, or other high-value items.

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. 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.

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, have a look at our example below.

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.

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.

Servcorp's recommended resources:

• Corporation Tax Overview

• Dividend Tax information

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.

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.

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.

Transferability of Shares

The flexibility when it comes to ownership changes is a practical advantage that PLCs are often loved for. Shares can seamlessly be bought, sold, or gifted with no difficulties in the process, 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 recognized by customers and clients, eliminating any possibility of confusion with other entities.

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 makes 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.