A lot of entrepreneurs decide to set up a private limited company nowadays. Unlike collaborating with somebody, or being a sole trader, this type of company represents a legal entity in its own right.
Namely, it comes with a different structure and requirements that are a bit more complex, like legal duties and different taxes. The biggest difference between working as a sole trader and establishing a limited company is the fact that a private limited company is differently perceived by the law.
Furthermore, a private company is formally registered and established with Companies House, and the shares are being issued to its shareholders. Now, if you want to know more about private limited companies, below we’ll dive into it more.
Advantages And Disadvantages Of Private Limited Companies
Separate Legal Entity
Let’s get started. When it comes to the advantages and disadvantages of a private limited company, we decided to list this one as one of the biggest advantages. Namely, the term entity can be defined as something which actually has true existence.
A company represents a legal entity, as well as a juristic person founded under the Act. Furthermore, a juristic person is a person who isn’t a human being, or a real person, hence, a company as a form of organization has a huge legal capacity, is able to have debts, and also own property.
The members of a company, which are usually directors and shareholders do not have any liability to the creditors of a company for these particular debts, therefore, a private limited company can be defined as a legal entity that is completely detached from that of its members.
You Pay Less Tax And National Insurance Contributions
Now, would ever turn down a potentially higher salary? The answer is nobody and that’s also one of the biggest advantages of setting up a private limited company and one of the main reasons why people turn to this option.
If you become the owner of a limited company, you are not going to pay taxes as you did before, as a sole trader. What is the difference? Namely, sole traders pay around twenty percent or more on everything they earn that’s over the tax threshold.
As the owner of a private limited company, you usually pay yourself a smaller amount of money, so that your personal tax can be as smaller as possible. Most of your revenue will be turned in the dividends.
They are usually taxed at a much lower rate, which means that you are capable of maximizing your salary. Besides this benefit, when you are paying most of your revenue via dividends, this means that you are not obligated to pay as much to the National Insurance contributions.
Professional Reputation Of Your Company
Being an owner of a private limited company creates a certain professional image and at the same time, enhances your reputation in the industry because these types of companies are always closely analyzed, assessed, and supervised than other structures in place.
It’s always a good idea to register your business as a private limited company because it is going to help you bring new investors and at the same time, allow you to be more competitive in your line of work.
Funding Becomes Much More Easier
A private limited company is separated from its directors, which automatically means not as much risk to lenders. Even though sole traders are still capable of accessing funding, they would probably get higher lending rates.
Now, there are limited company directors who aren’t so interested in lending, so they can always turn to the self-raising funds option by selling company shares. This isn’t something that sole traders can do. As a private limited company, you can always opt for these venture capital schemes:
- Enterprise Investment Scheme (EIS) – This can be perceived as a scheme that can help you get more funds for your company by approving investors some tax relief on shares they obtain in your business. In order to be eligible for something like this, you must get some investment within 7 years of your first sale. You can get approximately five million pounds each year.
- Seed Enterprise Investment Scheme (SEIS) – This also represents a scheme that can help you get the funds for your company by also approving investors some tax relief on shares they acquire in your company. Now, this scheme is intended for businesses that were recently established, or have just started trading, and can receive up to 150,000 pounds.
Disadvantage – The Whole Process Of Establishing A Private Limited Company
Setting up a private limited company is a little bit harder than doing it as a sole trader. So what are you supposed to do?
- You have to register it through Companies House and give them all the necessary information
- Think of the name that’s suitable enough and that isn’t currently utilized anywhere else
- Set aside some money for an administrative fee that has to be paid to Companies House in order to set up your company
Now, generally speaking, all these obligations are not that huge, they will take a few hours of your time, which isn’t the end of the world, however, the truth is that this whole process is surely more time-consuming than when you’re registering yourself as self-employed.
Information About Your Company And You Will Be In The Public Domain
The moment you set up a private limited company, Companies House is going to showcase some of your information publicly. What is it going to display? It’s normally your name, the address of your registered business, filing history, etc.
Now, this could be a problem, especially if you’re working from home since your residential address is going to be visible online, which isn’t the most convenient thing. Now, there are some websites that allow you to utilize their virtual office as your business address if you sign up for their accountancy package. Conduct research to see who offers this option.
Starting your own business is always exciting, yet can be intimidating for sure due to many questions that are revolving in your head. So we hope that we provided you with some answers at least when it comes to private limited companies.