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Private Limited Company Advantages and Disadvantages

What are the Advantages & Disadvantages of Private Limited Companies

Private limited companies offer several advantages including limited liability protection for shareholders, separate legal entity status, tax benefits, continuity of existence, and greater credibility in the eyes of investors.

That said, there are some downsides to a private limited company, these include the complexity of the setup, limited control for shareholders, limited flexibility due to restrictions, as well as costly compliance requirements.

Potential business owners should be aware of the advantages and disadvantages of a private limited company before setting one up. Understanding PLCs comprehensively ensures you make the right choice.

Read on to explore the advantages and disadvantages of private limited companies in more detail, giving company owners the information required to make informed decisions about business structure.

What Is A Private Limited Company?

Private limited companies are a popular type of business arrangement. They are a private business that’s owned by a group of shareholders.

Unlike other types of business, the people who hold shares in the company aren’t liable for the entity’s debts or obligations. In order to place distance between company success and shareholder risk, Private limited companies create a separate legal entity meaning that a shareholder’s personal assets are never at stake when they’re invested in a PLC company. This is in contrast to a sole trader for instance, where their personal assets are a risk if the company goes insolvent.

In relation to shares, PLCs cannot offer a public share issue and must place a limit on their shareholder investors. Small and medium sized businesses tend to be PLCs–they are also a desirable option for entrepreneurs looking to safeguard personal assets.

Advantages of Private Limited Companies

Limited Liability Protection

Private limited companies offer several benefits to business owners, the main one being the limited liability protection for shareholders. Any business can experience a downturn or become entangled in legal issues, which can lead to the owner’s personal assets being at risk–but this is avoidable with a PLC setup.

If a limited company is sued or bankrupt, shareholder assets are protected thanks to the company being a separate legal entity. Thanks to this arrangement, shareholders across the board have more confidence in their investments–it also helps to bring in new capital and take the business to new heights.

Separate Legal Entity

Private limited companies are separate legal entities from owners, which means the company can enter contracts, accrue debts, and be sued, without the company owner’s personal status or assets being affected in any way.

Having a private limited company makes it easier to raise capital and conduct business transactions, since investors and partners deal directly with the company as a legal entity rather than the company’s individual shareholders.

Tax Benefits

Private limited companies can also be eligible for a lower tax rate than other types of businesses, because they are treated as separate legal entities for tax purposes: company profits are taxed separately from shareholder income.

Furthermore, private limited companies can take advantage of various tax deductions and credits that are not available to other types of business. Tax deductions can include office costs, travel costs, salaries, and advertising.

Continuity of Existence

Continuity of existence is an important advantage for businesses looking to establish long-term relationships with customers, suppliers, and investors. Again, it provides investors and clients with peace of mind when investing.

Greater Credibility

In general, private limited companies are viewed as more credible and trustworthy than sole traders and other types of legal business entities. PLCs are subject to more stringent legal and financial requirements, such as audits.

Due to frequent audits, annual filings, and regulation compliance, it’s easier for private limited companies to attract investment, win contracts, and build strong marketplace reputations, making them competitive and successful.

The Pros and Cons of Shareholder Control in Private Limited Companies

There are plenty of advantages to becoming a private limited company, but there are drawbacks as well. PLCs are essentially owned by their shareholders giving them a stake in how the business is operated and its future direction–it means business owners are accountable to shareholders.

Find out more about the pros and cons of this below.

Pros:

  1. Shared ownership: Shareholders control the company and determine its directions reducing risk to owners and investors–this makes it far easier to bring in new capital.
  2. Professional management: Having a board of shareholders means better decision making, especially when it comes to professional management–it ensures efficient internal operations for the business.
  3. Accountability: Having a board of shareholders ensures accountability throughout the business and creates a reliable hierarchy structure–everyone must ultimately answer to the shareholder board.
  4. Profit sharing: This is when company profits are shared with employees in the form of a bonus–it reflects the company’s success and incentivises workers to continue to apply themselves in the role.

Cons:

  1. Disagreements: The downside of having a shareholder board is the increased likelihood of conflicts and disagreements about the direction of the business, or how it’s being operated internally.
  2. Limited flexibility: Due to shareholder control, there is often limited flexibility within the business, major decisions must be cleared by the board meaning there can be some delays in the decision making.
  3. Potential for a takeover: Private limited companies are always susceptible to takeovers due to loss of shareholder control–this can occur when a third party acquires a majority of the shares.
  4. Increased regulatory requirements: PLCs protect business owners from debts and bankruptcy, but there are lots of regulatory requirements for this legal entity. Meeting requirements can be costly.

The Main Disadvantages of Private Limited Company Structures

More Complex Setup and Management

PLCs can be more complex and time-consuming than other types of business, as there are legal and regulatory requirements.

Private limited companies must be registered with the appropriate authorities, legal documents must be drafted, and shares need to be issued. Additionally, private limited companies require ongoing compliance with laws and regulations, this can be costly and time-consuming for the business owner.

Limited Control

Since private limited companies are owned by shareholders, it can be difficult to manage the company on a day-to-day basis; decision making is divided between multiple shareholders so it can be challenging to interact efficiently.

Additionally, shareholders may have different goals and priorities for the company leading to conflicts and disagreements about the direction of the company. Meetings are needed to gain consensus on important issues.

Limited Flexibility

Private limited companies might find it hard to adapt to changing market conditions due to limited flexibility. PLCs are subject to more stringent rules and regulations than other types of business placing limits on adaptability.

For example, private limited companies may have limits on the number of shareholders, restrictions on transferring shares, and requirements for holding annual meetings that prevent the PLC from pursuing opportunities.

Costly Compliance

As mentioned, private limited companies are subject to more stringent rules and regulations including legal and industry requirements. While this ensures the company can operate legally within its given industry, it can be costly for owners. Companies must conduct annual audits, file reports, and lots more.

Navigating the Complexities of Private Limited Company Setup and Management

Setting up a Private limited company is advantageous, especially if you want to attract investment and protect ownership from company insolvency, however, PLCs can be challenging and time-consuming to establish at first.

As business owners, it’s imperative to understand the legal obligations for successful registration of the company with local authorities, including appropriate legal documentation, and shareholder rights and responsibilities.

Business owners must also understand the on-going responsibilities of a private limited company, these include conducting annual audits, filing annual reports, and complying with corporate governance regulations. PLC owners must understand their legal obligations and cover the ongoing cost of audits.

Business owners who don’t understand PLC complexities before setting up the company can find themselves in legal entanglements or face significant fines. It’s therefore crucial to gain a comprehensive understanding of PLCs before establishing one. If in doubt, seek professional advice on the legalities.

The Trade-Offs of Limited Flexibility in Private Limited Companies

Restriction on the transfer of shares, limits on the number of shareholders, and restrictions on raising capital; these are some of the limitations you can expect when you decide to establish a private limited company. Often described as a trade-off, these limitations must also be carefully considered.

The limitations placed on a private limited company can make it harder to adapt to a changing marketplace and economy. While the limitations provide structure and stability for the company, they can also influence its growth.

PLC limitations can make it challenging to attract investors and raise capital, decision-making within the company can also be slower due to multiple shareholders. However, the structure is more beneficial for long-term stability.

Ultimately, business owners should carefully weigh the trade-offs of limited flexibility against the other advantages and disadvantages of a private limited company structure before making a decision.

Deciding Which Type Of Company Structure Is Best For Your Business

Choosing the right company structure is a crucial decision for any business owner, since it impacts the way the business operates, along with its tax liabilities, corporate responsibilities, and personal liabilities for its owners.

Before making a decision on a company structure, business owners must understand the various types of business structures available, along with the advantages and disadvantages.

Consider the following factors: 

Business goals: If you think that you might want to raise capital through public funding, you may want to consider a public limited company structure.

This enables you to sell shares in the business publicly for capital investment. You can always change the company structure if this idea becomes appealing later down the line.

Legal and regulatory requirements: Be aware of the tax reporting, regulatory and compliance requirements for each type of company structure. Some require far less work than others, but this must be offset by the legal protections and personal liabilities offered.

Tax implications: Whether you want to submit your earnings via a self assessment form, or formal company accounts, this can impact the type of company structure you choose. Each will have different reporting needs and tax implications. Eventually though, most businesses will benefit from using the limited company structure once earnings exceed a certain threshold.

Liability: Consider the level of personal liability you are willing to adopt as a business owner. For example, sole traders and partnerships have unlimited liability – personal assets are at stake – while limited companies have limited liability protection to their business owners.

Size and complexity: Consider the size and complexity of your business now and in the future, as well as your resources and ability to manage the administrative requirements of the company structures.

Smaller, one man band businesses will do well as both self employed or limited companies, but those will multiple stakeholders involved need to decide if a partnership or limited company is the way to go.

How To Set Up A Private Limited Company

If you have evaluated the pros and cons of private limited companies and have now decided that this business structure is right for your business, here is a run through of how to set one up.

Simple steps to set up a limited company: 

Choosing a company name: Picking your company name is an important first step. It needs to be unique and it’s helpful if it can also help potential customers to understand what you do. For example ‘Carpets Of Wirral’. The name must be unique – so use Companies House online to check that nobody else has your chosen business name already.

Appointing directors and shareholders: You will need to appoint at least one director and one shareholder to operate a limited company. Each has different responsibilities in the management of the company.

Registering the company: With the directors, shareholders and business name in place, you can now register your company with Companies House. This involves filling out basic contact information online and paying a small registration fee. You will be issued with a company number in return that must be included on all business stationery and formal documents.

Drafting legal documents: The company’s articles of association and memorandum of association are important regulatory documents required for all limited companies. They outline the purpose, rules, and regulations for the business around the following areas:

  • Issuing shares: how and when shares are issued to shareholders, how much they total and who owns what percentage. The allotment of shares needs to be registered with Companies House.
  • Registering for taxes: Register your company for taxes, such as Corporation Tax, Value Added Tax (VAT), and PAYE (Pay As You Earn) for employees.
  • Setting up company bank accounts: A dedicated business bank account is required for all limited companies. This keeps personal and business finances separate.
  • Registering for other permits and licences: Depending on the nature of your business, you might need to register for permits and licences, such as a food sale licences or trading permits.
  • Complying with ongoing regulatory requirements: Ensure ongoing compliance with regulatory requirements, such as filing annual accounts and annual confirmation statements with Companies House.

It is important to seek professional advice and guidance throughout the process to ensure that all legal and regulatory requirements are met

Following the steps above will get you started on the journey of owning a private limited company. Whilst not exhaustive, as every business is different, it provides a useful starting point.

Summary

Private limited companies are a great choice for business owners looking to distance themselves from being personally liable for the financial and legal side of the business.When you establish a PLC it makes it easier to bring in capital too.

That said, there are some downsides to private limited companies–especially since they are owned by a group of decisive shareholders. Disagreements about the company’s internal structure and future direction might create inefficiencies that hinder the business which can in turn affect morale and the bottom line.

Establishing a business entity as a private limited company is a bright idea for the right business–but it’s not right for everyone. Business owners must consider the pros and cons carefully, and make decisions with expert advice.

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