It’s one of the crucial choices for entrepreneurs, and a query we hear time and again – what are the typical private limited company advantages and disadvantages?

Private limited companies are the most common type of businesses in the UK, representing more than 95% of corporate bodies on the register since 2005, reports Companies House.

Being a prevalent business structure, the formation of a private limited company isn’t always given a lot of thought.

However, it’s a significant decision that comes with its unique set of advantages and disadvantages compared to, for example, operating as a sole trader.

Let’s explore the details of a private limited company to help you navigate this decision with clarity and confidence.

Private limited company advantages

Here are some of the main advantages of a private limited company:

Limited liability

  • One of the most significant advantages of a private limited company is the protection of personal assets. 
  • Shareholders’ liability is limited to the amount they have invested in the company – this means personal assets are not at risk if the company faces financial difficulties.

Professional reputation

  • Being registered as a private limited company often carries a perception of credibility and stability.
  • This professional image can enhance your business’s reputation among customers, suppliers, and potential investors.

Tax efficiency

  • Private limited companies in the UK may experience considerable tax advantages – the corporation tax rate is generally lower than the higher personal income tax rates. 
  • Additionally, directors can optimise their income through a combination of salary and dividends, potentially leading to further tax efficiencies.

Raising capital (to some extent)

  • A private limited company can issue shares to investors, a valuable tool for raising capital.
  • This ability to secure investment can be crucial for expansion and development projects without requiring loans or incurring debt.

Succession planning

  • The structure of a private limited company allows for easier succession planning. 
  • Shares can be transferred or sold, facilitating the smooth continuation of the business beyond the involvement of its original owners.

Other advantages include – protecting a company name by registering it as a trademark, providing pension schemes for staff, plus splitting income between salary and dividends.

Think this is the right path for you? Take a look at our guides on ways for businesses to pay less VAT and what to know when hiring your first employee!

Private limited company disadvantages

However, here are some potential disadvantages of a private limited company:

Regulatory requirements

  • Operating as a private limited company introduces a range of regulatory requirements, including the need to file annual accounts and returns with Companies House.
  • These obligations can increase administrative burdens and necessitate professional assistance, potentially incurring additional costs.

Limited capital-raising opportunities

  • While private limited companies can issue shares, they are restricted in their ability to raise capital through public markets. 
  • Unlike public limited companies, they cannot list their shares on the stock exchange to attract investment from the general public.

Dividend distribution vs. profits

  • Profit distribution to shareholders is through dividends in a highly controlled manner, paid from post-tax profits. 
  • This means the money distributed has already been subject to corporation tax, which could result in less efficient personal tax planning for shareholders.

Restrictions on ownership and transfer of shares

  • There can be restrictions on the sale or transfer of shares in a private limited company, often detailed in the company’s articles of association.
  • These restrictions can limit flexibility and potentially complicate the process of bringing in new investors or facilitating an owner’s exit.

Record keeping

  • Private limited companies need to keep detailed business records up to date and they receive greater scrutiny over their decisions.
  • This transparency is good for building trust, but requires thorough record-keeping and skilled expertise.

Here’s how long you should keep accounting records for in the UK. Also – do you need a small business accountant, or can you go it alone?

Other potential disadvantages include higher administrative costs compared to working as a sole trader.

Learn more about the difference between operating as a sole trader or limited company here. On a related note, find out more about paying tax on a side hustle under UK law. 

Final thoughts: What are the advantages and disadvantages of a private limited company?

A private limited company offers several advantages and disadvantages for business owners. One significant advantage is that shareholders are not personally liable for the company’s debts beyond their investment, unlike sole traders who are fully responsible for business liabilities. 

For example, for a private company operating as a separate legal entity, the corporation tax rate is generally lower than when you pay income tax at higher personal rates.

Private companies also benefit from a protected business name, which other entities cannot use once registered. Additionally, this structure often enjoys tax efficiency, paying corporation tax on business profits at a lower rate compared to income tax for sole traders.

However, there are some drawbacks to consider. Private limited companies face higher regulatory compliance requirements, including the need to maintain detailed records and file accounts regularly. 

They also have to handle more complex tax obligations, such as paying corporation tax and managing national insurance contributions for both the company and its employees. 

Another potential disadvantage is the limited transferability of shares, as private companies cannot list their shares for public sale, which may restrict access to capital in some cases.

Despite these challenges, many business owners find that the benefits of a private company – limited liability, professional credibility and potential tax advantages make it an attractive option for structuring their business. Furthermore, shareholders with a significant interest in the company can often influence major decisions, providing a level of control that may not be possible in other business structures.

Here at Accountants East London, we pride ourselves on delivering tailored, value-driven accountancy services.

Whether you’re considering forming a private limited company or seeking strategic advice for your business, our team of experts has 30+ years of experience in accounting.

No business query, accounting question, or financial service, is too big or small for us – we’re here to help. For advice specific to your unique business needs, get in touch for a no-obligation chat today.