A Comprehensive Guide to Private Limited Company

Suppose you plan to launch a new business or expand an existing startup. In that case, you can choose among different structures: business partnership, sole trader, public limited company, or private limited company.

It’s not a one-shoe-fits-all solution for a small business owner, so it’s important to know each structure’s ins and outs before making a decision.

A private limited company is the most popular form of business for new startups. A private limited company is known for its flexibility, ease of formation, and limited liability.

Are you interested in learning more about the private limited company structure? If so, you’re in the right place. Walk with us in this post as we dissect the structure’s benefits, downside, and formation process to help you make the right decision.

What is a Private Limited Company

Private stakeholders own a private limited company. The liability arrangement of a shareholder only extends to the shares they hold.

The startup ecosystem is booming, and more people are venturing into self-employment. Legally, a private company is an entity with rights separate from that of the owners and has special status. Whatever the company owns, profits, assets, or liabilities belong to the business, not the owners.

The law requires that a private limited company be incorporated with Companies House and then shares issued to shareholders who own the organisation.

A company can be owned by an individual who has total control over the company and is responsible for making all decisions.

In situations where the company has multiple shareholders, every one of them has voting rights proportional to their shares. The shareholder (s) with the most shares are known as People with Significant Control (PSC) because they can influence decision-making in the company.

The Private Limited Company

In the UK, a private limited company can be operated by a single person without employees, while larger companies have massive turnovers. A limited company in the UK is in two categories:

1. Limited by shares, where shareholders invest capital in a business and
2. Limited by guarantee, the business has no shares or shareholders, but it is owned by guarantors who agree to pay a specific amount to settle company debts.

So, what does ‘private’ mean? Private means private investors privately own the business. Unlike public companies that can open the business to the public, shareholders must be invited into a private company by purchasing shares.

Public companies may seem like a better option for some, but the structure has more reporting and statutory requirements. Their minimum share capital is £50,000, and one-quarter of the amount must be paid upfront. However, in a private company, there are no minimum capital requirements.

Understanding the ‘Limited’ in a Limited Company

Will my company be limited in its operations? NO! The term-limited only refers to the liability of shareholders.

The business is separate from the owners, making it an independent entity under the law, and the shareholders are liable for their share value. The shareholders’ assets are never at risk whenever the business is in debt.

In contrast, a sole trader has unlimited liability and can be held liable for any debt the business incurs and can’t pay.

Generally, a limited company by shares is a profit-making business, while a limited company by guarantee is a non-profit.

The Structure of a Private Limited Company

Under the law, a private limited company is distinct from the owners or shareholders. The structure consists of the following key components:

1. Shareholders

Shareholders own the company by investing through buying of shares. They are the owners of the company who invest capital in exchange for shares. Unlike a public limited company, which can offer shares to the general public, a private limited company can only issue specific shares to a restricted number between 2 and 200.

2. Directors  

As the company owners, shareholders appoint directors to run the daily activities of a company by making strategic decisions on the company’s behalf. Directors have fiduciary roles and are expected to act in the company’s and its shareholders’ best interests while making independent judgements.

3. Articles of Association

are like internal rules and regulations governing a company’s operations. They define the rights and responsibilities of owners, directors, and other stakeholders, as well as the decision-making process and corporate governance.

4. Memorandum of Association

This is a company’s constitution, making it legal. It displays the company name, registered office address, powers, and objectives. The document is filed with the company’s Registrar during formation and published on the public register.

Benefits of a Limited Company

Forming a limited company has many benefits, explaining why it’s the most popular business structure. Here are some of the benefits:

1. A separate legal entity (limited liability) from the owners means the business has its rights. In a limited company, your business finances are separate from personal finances.
2. Personal Liability Protection means your assets are never at risk if the business fails. The only liability you bear as a shareholder is equivalent to your shares.
3. Forming a limited company adds to your business credibility. As a limited company, securing funds for your business is easier than in a sole trader, and there’s less personal risk.
4. Boosts customer confidence because you’re perceived as a professional and reputable entity. Customers and business partners will trust a limited company more.
5. Unlimited lifespan even when a director retires or passes on. The private limited company continues to trade.
6. Lower tax rates benefits are only applicable in a private limited company. Besides lower corporate tax rates, other incentives include lower tax deductions for business expenses and exemptions for some incomes.
7. Maintaining the business is easy and at a low cost. If need be, preserving a business name is also easy and viable.
8. Easy transfer of shares in a private limited company or selling to other parties is a smooth transition. The flexibility of this structure makes it more popular among business owners and shareholders who may want to exit or increase capital at their convenience.

The Downside of Private Limited Companies

Although a private limited company has a handful of advantages, the structure also comes with some downsides you should know about. They are:

1. Expensive to set up

The procedure of setting up a private limited company is tedious, time-consuming, and costly. You begin by choosing a business name, registering the company with Companies House, nominating shareholders, appointing directors, and gathering legal documents.

2. More administrative duties

It’s a legal requirement to maintain three different records:

• The duties include a report on company activities, such as director lists, shareholders, and voting decisions.
• Financial records that contain all transactions.
• Keep an accurate and up-to-date record of People with Significant Control (PSC).

Additionally, there are other relevant laws a private limited company must adhere to like:

• Maintaining up-to-date and accurate records
• File accounts and
• Pay Corporation Tax

Depending on your business’s nature, the business’s burden might be too high. If you find yourself at this crossroads, you may have to appoint a company secretary to help handle those tasks, which will increase business expenses.

3. Public Inspection

The business records you presented to Companies House during incorporation are open to public scrutiny. They’re accessible to anyone in the public domain, including competitors, customers, investors and other third parties. Hence, it’s a challenge to maintain privacy about ownership, turnover, or significant business changes, which gives your competitors useful information about your business.

4. Financial Reporting

Private limited companies must maintain accurate and up-to-date financial records. These reports must be filed with Companies House and HMRC each financial year. It means preparing and submitting a full set of statutory accounts according to recognised accounting practice.

How to Form a Private Limited Company

The formation process of a private limited company depends on the jurisdiction in which it is registered and the legal requirements there. Here’s a general process when forming a private limited company:

1. Name Reservation

If you have a business idea but aren’t ready to start trading, reserve a business name to ensure no one else can use it. Name reservation is done at the Registrar of Companies, and there are laws and regulations you must adhere to.

2. Gather Documents

There’s a whole list of documents required by the law to incorporate a company, like the Memorandum and Articles of Association. These documents profile the company's business structure, goals, and regulations, and they must comply with relevant laws.

3. Register with Companies House

The UK Registrar of Companies is the Companies House, where you present all completed documents alongside registration fees. The Registrar will review the documents for authentication, and if they are satisfied, they’ll issue a Certificate of Incorporation. Now, your private limited company is officially recognised by the law.

4. Shares Allotment

Shareholders must allocate shares once a company is incorporated based on their investment contributions. Shareholders invest in the company after the company share is divided into shares of a fixed denomination.

5. Appointment of Directors

A private limited company can have a minimum of two directors who shareholders appoint. Company directors have duties they must fulfil as per the law and make decisions on behalf of the company. There’s no age limit to become a company director, but anyone eligible must be of legal age, able to act within orders and make independent judgements. Whatever a director does, it must be reasonable and in the company’s best interest.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

Frequently Asked Questions

What should I know about the legal structure of a limited company in the UK?

In the UK, a private limited company is the most popular form of business structure. A private limited company is registered at Company House and operates as a separate entity from the owners.

Is there a limited share capital for a private limited company in the UK?

The law doesn’t provide minimum capital a private limited company must have, apart from the one share that must be issued during incorporation.

Who controls a private limited company in the UK?

A private limited company is controlled by directors, whom the company’s shareholders appoint after the PLC is formed. The directors manage the business activities and make decisions that help the company grow.

Conclusion

When you set up a business in the UK, consider registering a Private Limited Company (PLC), as it comes with a handful of benefits. However, learning about its disadvantages will help you make the right decision.

The private limited company structure is popular among entrepreneurs because it’s flexible, has limited liability, and has security as it is a separate legal entity with its rights. Hence, your assets or finances will never be at risk whenever the company has debt or legal issues. Do have any questions on registering a private limited company in the UK? Contact one of our Incorpuk experts here.