What is a private limited company? (plus additional factors)

By Indeed Editorial Team

Published 8 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Business ownership can take a number of forms, from an individual registered as a sole trader to multi-national conglomerates with worldwide workforces. You may wish to understand how a private limited company operates and the benefits of becoming involved in one. In this article, we explain what a private limited company is, examine the structure of private limited companies and list the advantages and disadvantages of running such an organisation.

What is a private limited company?

A private limited company is an organisation owned by shareholders who have each invested a sum into the business. A shareholder enjoys a limited liability in the company and receives yearly dividends from any profits made. Private limited companies are most recognisable by the legal abbreviation 'Ltd.' which often appears after a company's name.

There are no size or industry classification restrictions to setting up a private limited company. Service providers, retail outlets, product manufacturers and digital enterprises are all equally entitled to incorporate as private limited companies. For example, painters, doctors, website designers, metal fabricators and greengrocers can all register under the Ltd. umbrella.

Related: 4 types of businesses to start

What is the role of a shareholder in a private limited company?

A private limited company in most jurisdictions, including the United Kingdom and the Republic of Ireland, is an organisation registered to private shareholders. Business owners can invite their shareholders to buy shares in their company. Having bought their share or percentage of the business, they then own a legal stake in it. Each shareholder is legally limited to liability if the business ceases trading or accrues debt. This means that shareholders are typically never legally liable to owe anything more than their original share in the company.

From its annual profits, all private limited companies pay annual corporation tax. After this tax deduction, the shareholders can divide the remaining profits between themselves. While there are some drawbacks to operating as a private limited company, for most enterprises, the advantages greatly outweigh them. Their owners often enjoy the protection and security to which their limited liability status legally entitles them.

Related: Shareholder vs stakeholder: definitions and differences

How does registration work for a private limited company?

A private limited company first becomes incorporated at Companies House under an original name. As hundreds of companies register daily, you're allowed to get creative when deciding your own unique identity. Once incorporated, then legally, a private limited company is a separate entity to its owners. The company exists and operates independently and can effectively operate and enter into contracts under its own name.

The cost of registering a private limited company can vary between £12 and £100, depending on the method used to incorporate a company. You can complete the registration online. This method is typically the simplest and most cost-effective.

Advantages of running a private limited company

Notable advantages of trading as a private limited company include:

Individuals running private liability companies

From an individual to a huge organisation, anyone can register as a private limited company. The majority of tradesmen, such as plumbers or gardeners, often operate as sole traders, but many find benefits in operating as private limited companies. The prospect of greater take-home pay is the principal incentive for many self-employed individuals. Once an individual incorporates their limited business, they become the director of that business.

When an individual operates as a private limited company, they pay less tax and national insurance contributions. Whereas a sole trader pays upwards of 20% on everything they earn, directors of private limited companies incur reduced personal tax by paying themselves smaller salaries and enjoy increased income from their dividends, which are taxed at a lower rate.

Limited legal liability

Limited legal liability protects the owners and shareholders. Running a limited company also gives the owner a degree of security because they know that their liability will remain limited. Given that there may always be a financial risk to self-employment, limited companies protect the owners from debts they may incur, being that they're separate entities from their owners. From a legal perspective, the directors and shareholders aren't personally liable for the debts of the company. If a limited company becomes untenable, no individual member would owe more than the share value they initially invested.

A diverse range of businesses

Private liability companies allow anyone of any trade or training to run and own their own enterprise. No matter what industry you're involved in, you can register as a private limited company. You may provide an individual or wide-reaching service, or you may produce bespoke items or mass manufacture goods. Individuals or groups who decide to become limited companies realise it can offer a more professional, credible and prestigious status to their unique goods or service. Registering a company in this way demonstrates organisation and commitment to commercial success.

Branding and private limited companies

With its name legally protected by copyright, a company can build its reputation for quality service or products. Once a company becomes a trusted brand in its marketplace, no other company can compete under the same or very similar banner. A potential client may view a private limited company with clear and definitive branding in a more trustworthy and reliable light than sole traders or partnerships, potentially giving it a competitive edge over its competitors.

Related: What is corporate branding? (And how to improve it)

Protection from outside influence

The company enjoys protection from outside influence, as all shareholders are subject to invitation only. Owners usually share the trust of their shareholders and common ambitions for the company's goals. This business structure ensures that no third party, such as a competing company or external stakeholder, can hold any sway over the company's policymaking or business strategies.

Related: PEST vs. SWOT analysis (plus benefits and limitations)

Selling shares, trading out and fundraising

Shareholders are free to sell their shares or trade out at any time, allowing them to capitalise on the success of the enterprise. Private limited companies are more attractive entities to investors and lenders because of their limited liability status. Lenders can't lose or become liable for more than their initial investments, which makes seeking funds less risky. Members can sell some or all of their shares for important fundraising, an advantage not shared by sole traders.

Private limited companies can also avail of funding from these venture capital schemes:

  • Enterprise Investment Scheme (EIS): Under the EIS scheme, a company can raise up to £5 million each year and a maximum of £12 million in a company's lifetime.

  • Seed Enterprise Investment Scheme (SEIS): Designed for new small companies, the SEIS allows individuals to invest up to £150,000 in fledgling companies.

Related: What are the characteristics of successful entrepreneurs?

Disadvantages of running a private limited company

Some drawbacks of trading as a private limited company include:

  • Corporation tax returns demand a lot of paperwork.

  • Some enterprises may disclose their financial affairs to third parties in certain cases.

  • Establishing a private limited company can be demanding in the early stages.

  • Accounting or professional financial assistance may be a cost factor.

  • The company is expected to distribute dividends annually to its shareholders.

Why are private companies limited by guarantee important?

A company limited by guarantee (CLG) typically includes nonprofit organisations, such as charitable organisations, trade associations and sports and social clubs. Similar to private limited companies, the members get invited, but there are no shareholders. Its owners instead are guarantors who each agree to pay a nominal sum towards the company's debts. As with the shareholders of private limited companies, the owners enjoy the benefits of limited financial liability. Any profits generated by a CLG don't get distributed between its owners. Usually, such proceeds get reinvested into the enterprise to continue to promote the company's objectives.

Related: How to become a stockbroker

Private limited company vs public limited company

Although private limited companies share the same acronym as public limited companies (PLC), there are very clear distinctions between the two business entities. Sometimes, after a period of growth, a private limited company may wish to continue to expand. If such a company's share capital reaches a value of £50,000, then it becomes eligible to become a public entity. After a majority of 75% of the shareholders agree with the decision, they file the paperwork to go public, once again through Companies House.

Anyone can invest or buy shares in a public limited company. This investment allows the company to raise capital with further ease and increase expansion accordingly. They also have the option to list on the stock exchange. Unlike limited liability companies, they require two directors as opposed to one. Compared to public limited companies, private limited companies are more complex organisations to run. They require transparency regarding all financial dealings and hold annual general meetings (AGMs) to ensure all their shareholders stay informed of the financial well-being of the companies.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed. This article is based on information available at the time of writing, which may change at any time. Indeed does not guarantee that this information is always up-to-date. Please seek out a local resource for the latest on this topic.

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