What Does it Mean to be a UK Private Limited Company?

Ryan Patrick

• 7 min read
What Does it Mean to be a UK Private Limited Company?

When registering a business, you must choose which type of company you will register, from a sole trader to a private limited company. Although there are different types of companies in the UK business structure, private company limited is one of the most used types. The Federation of Small Business states two million active private limited companies are in the UK.

Are you interested in expanding your business or forming a private limited company in the UK but don't understand how it operates? This blog will unearth everything you need to know about private limited companies. So continue reading as we check a private limited company's structure advantages and disadvantages.

What's a Private Limited Company?

A private limited company is a business that is an own-right legal entity, meaning its identity is separate from its owners. So, the company's liabilities, profits, and assets belong to the business, not the shareholders.

This company is registered with Companies House, and its information must appear on the public register. Every limited company must adhere to the rules and regulations in the Companies Act 2006.

Types of Private Limited Companies

Here are the types of limited companies in the UK, namely:

Private limited by guarantee

A company's limited guarantee caps its guarantors' liability to the term of money they agreed to pay when a company is wound up. Non-profit entities like charities, student unions, clubs, societies, social enterprises, etc, commonly adopt this structure to restrict the financial obligation of their members (owners) in case of any liabilities.

This type of company doesn't have share capital or shareholders. Instead, its members are guarantors and are typically liable for a minimal amount, such as £1, if the company is dissolved.

Private companies limited by shares

These companies are also known as private limited companies. They must include 'Limited' or 'Ltd.' at the end of their name. This type of business is popular because shareholders' liability in case of liquidation is limited to the company's reserves. In contrast, a sole trader bears full personal liability for business debts, risking the seizure of personal assets.

Private limited companies have no minimum capital requirement, leading many to start with minimal investments. Nearly 90% of UK private limited companies are categorised under small or medium-sized businesses, enabling their directors to submit simplified accounts to Companies House.

Setting up a Private Limited Company

1. Before you apply for company registration, ensure you have these basics:

  • Your company name
  • Your corporate purpose
  • The SIC code for your business industry
  • An address
  • Starting capital
  • Form of governance
  • Activity type, voting rights, and distribution of shares

2. Have your business headquarters: the company address can be virtual or business premises. When choosing an address, ensure you don't use your residential address, or it will be permanent. This will help avoid making changes to the Companies House

3. Choose a suitable company name: although it seems like a simple process, the name must be unique and shouldn't contain insensitive words. So ensure, before using the name, you check it against the register to confirm it's not taken. The name you choose must include LTD or Limited at the end.

4. Complete your company memorandum and article of association:  These papers serve as official documentation of the establishment of your limited company. The Memorandum of Association is a statement verifying the company's formation and identifying its shareholders.

The Articles of Association outline the company's management and governance structure. Companies House offers a standardized template for these documents, accessible to all.

5. Capital for company incorporation: as long as you have a capital of more than 0, you can set up a limited company. The amount must be paid in the shareholders' bank account for a maximum of two years since the company's creation.

Although it's easy to set up a business, getting a business bank account is tricky, so it's advisable to approach the bank and know the process and requirements. If you're a non-resident, you will need more documents, and opening a company bank account may take longer.

6. Register with UK companies registrar: it's a requirement for every private limited company to register with Companies House. It's an easy process that takes 24 to 48 hours, and once the registration is published, Companies House will inform you through post or email.

7. Receiving the Unique Taxpayer Reference and VAT number: once your company is created, it will be assigned UTR by post. If your company has a turnover of over £85,000 yearly, get VAT from the HMRC.

Characteristics of a Private Limited Company

What attracts most investors to private limited companies is their attractive characteristics. Before considering its advantages and disadvantages, let's see what makes this business admirable.

Limited liability

A private limited company is a business providing its shareholders with limited liability, safeguarding their assets. Their liability is restricted to the value of their investment in the company's shares, ensuring their wealth remains unaffected in the event of financial or legal challenges faced by the company.

Ownership and shareholders

A private limited company can have between two and fifty shareholders, fostering a close-knit ownership structure while retaining its private company status. Ownership is based on shares, which shareholders can transfer according to the company's articles of association.

A company is recognised as a distinct legal entity by law, enabling it to engage in contracts, own assets, initiate legal actions, and be subject to legal proceedings under its name. This separate legal status bolsters the company's credibility and facilitates the smooth execution of business transactions.

Board of Directors

This type of company must have a board of directors to manage its affairs. The members appoint these directors and play a vital role in making the company's important decisions, representing the business interest, and ensuring compliance.

Minimum capital requirement

In contrast to other business structures, private limited companies do not impose strict minimum capital requirements. This offers entrepreneurs an appealing option for initiating ventures without significant upfront capital.

Privacy and confidentiality

The company offers greater privacy and confidentiality to its members than public companies. Directors, shareholders, and financial information aren't easily accessible to members of the public, providing more security to the officials.

Perpetual existence

Limited companies take advantage of the characteristics of perpetual existence. This means its existence isn't affected by the death of a director or a shareholder. The company will continue operating, ensuring stability.

Advantages of Private Limited Companies

These companies offer greater advantages than sole proprietorship. Let's check their advantages.

Smaller risks of personal liability

As a sole trader, you bear full personal responsibility for debts and obligations incurred by your business. However, in a private limited company, shareholders are solely liable for debts up to the amount invested in shares. This mitigates the risk of personal asset seizure to settle business debts in the event of failure.

Lower taxation

Sole proprietorships pay National insurance contributions and income tax on company profits on the annual self-assessment tax return, which is higher than taxation of private companies. On the other hand, a private limited company pays the Corporation tax, which is calculated on the company's income minus allowable company expenditure.

Higher business profile

A limited company is seen as more substantial than a sole trader business. Before customers trust your business, they must be confident that your company has the resources to provide their desired services. The potential investors also share the same perception, meaning you can attract funding easily with a limited company.

Easier to access money to grow your company

Getting capital to grow your business as a limited company is easier than for sole traders. You can get funds from banks and other financial institutions because lenders perceive limited companies as low-risk. Moreover, you can raise share capital through the selling of shares.

Personal income flexibility

Owners or directors of private limited companies can compensate themselves through a blend of salary and dividends. Opting for dividends, which are taxed at a lower rate, can decrease the tax liability and offer a more tax-efficient payment than solely receiving a salary. Additionally, directors have alternative methods to withdraw funds from the company, such as:

  • Bonus payments
  • Pension contributions
  • Directors' loans
  • Private investments

As a sole proprietor, you won't have that flexibility. You will take income from business profits, taxed at a standard personal income rate.

Protect company name

Once you register a company with Companies House, that name becomes protected, and no other business will use it. Any other company wishing to register a business must check its availability.

When Companies House realizes a matching business name, they advise the company and won't grant permission. This protection ensures other businesses cannot sell your product copies.

Company pension provision

You can take advantage of a limited company pension scheme or invest money in a private individual pension scheme. In sole trading, owners make their own provisions.

Disadvantages of a Limited Company

Even though these companies offer many advantages, they have their downsides. This includes

High set-up costs

You must follow specific procedures when setting up a limited company, which can be costly and time-consuming. You start by registering with Companies House, appointing directors, and preparing the articles of association. In sole trading, you only register with HMRC.

Huge administrative burden

  • Limited companies must have these records
  • Company activities are recorded, like a list of shareholders, directors, and voting decisions
  • Records of a person with significant control
  • Financial records

You must also comply with rules and regulations such as paying Corporation Tax, filing accounts, and maintaining accurate company records. You can also appoint a secretary to handle these tasks at a fee if the burden becomes too heavy.

Final words

There are many advantages to setting up a limited company in the UK, although there are also some disadvantages. With all mentioned above, deciding on an ideal company structure may be complex, especially if it's your first time registering a business or you're abroad. Fortunately, at Incorpuk, we will advise you on sound business structures and help you register one that suits your business needs. Our expert advice will help you understand better and make the right decision. Contact us and talk to our business advisors.