If you plan to start a business in London, this is the right time. Europe, especially London and Greater London, has witnessed massive burgeoning opportunities for business and entrepreneurial activities in recent years. As a global financial hub, the place attracts entrepreneurs and investors due to its dynamic economic landscape and striking start-up culture. Talking about start-up culture, if you are planning to start an entrepreneurial journey, it is important to identify the type of company you plan to establish. Deciding on the business structure – one of the primary requirements of starting a business and a private limited company is quite a preferred choice. To understand this preference, it is important to realise what are the advantages of a private limited company.

In this blog, apart from discussing the advantages of being a private limited company, we will also cover the disadvantages of starting a private limited company and some tips to take into consideration while starting a private limited company.

Advantages of Private Limited Company

Discussed below are some of the major advantages of a private limited company –

  • Easy and Large Access to Capital – The biggest advantage of being a private limited company lies in its capacity to raise capital. A private limited company can easily access a large pool of funds by issuing shares. This further allows easy infusion of funds that could be used for expansion of the business, making investments or acquiring new technologies. The fact that they can a private limited company can easily attract investors, allows significant financial robustness.
  • Limited Liability – Limited liability is one of the primary advantages of a private limited company. In a private limited company, the assets of the shareholder are well covered against the debts and liabilities of the company. This cushion ensures that in case of challenging or depressing business conditions, the financial repercussions will not affect anything other than the initial investment of the shareholders.
  • Secured Business Name – Another advantage of being a private limited company is that your business name is protected and cannot be used by any other company once you register it with "Companies House". It is necessary to confirm if a name is available before registering it. Companies House will notify the business and withhold authorisation if they identify a name that matches or is very similar. It is challenging for other businesses producing imitations of your products to "pass off" their goods as authentic due to this degree of protection.
  • Better Business Profile – Compared to sole proprietorships, private limited companies are seen as more significant. When clients make orders or grant contracts, they want to know that the provider is equipped to deliver a dependable service. Given that investors hold a similar view, raising capital as a private limited corporation might be simpler.
  • Taxation Benefits – Sole proprietors pay income tax and contribute to the National Insurance basis the profits of the business through an annual self-assessment tax return. The income tax and national insurance contribution rates are the same as those for private individuals. Now private limited company pays corporation tax, which is income less permissible business expenses. Smaller companies can claim a greater range of allowed expenditures, and the corporation tax rate for them is lower than the corresponding income tax rate. As an owner of a private limited business, you are subject to personal income tax and National Insurance contributions, but you also have more choice in how you pay yourself, which may result in lower personal tax. Note that if these tax structures seem complicated to you as a new entrepreneur, you can always take the expert help of accountants in London and ensure that you have the right information.
  • Flexibility of Personal Income – As an owner of a private limited company, you are entitled to dividends in addition to your income. Dividends are more tax-efficient than salary income as they are taxed at a lower rate, which will lessen your tax liability. There are also other avenues to withdraw funds from the company, such as bonuses, pension contributions, director loans, and private investments. These provide varying levels of tax efficiency and income flexibility, which is a major advantage of private limited companies.
  • Provision of Company Pension – When it comes to the advantages of a private limited company, pension and the scope of investing in a company pension scheme is also a major factor to consider. Individual proprietors have to put in extra effort to create their own retirement fund and it is not backed by the business structure. It is a separate financial management that the proprietors have to engage in.
  • Transferability of Shares: Another advantage of a private limited company is ownership flexibility. The structure of a private limited company is such that new investors can easily be added and the existing ones can exit with the same ease. This space of allowing transferability of shares helps in adapting to market conditions and changing capital requirements.

Disadvantages of Private Limited Company

While the advantages of a private limited company are many, there are some disadvantages as well. And if you are a budding entrepreneur planning to start a private limited company, you must be aware of them.

  • High Cost of Setting Up – Several processes, some of which can be expensive and time-consuming, need to be followed when establishing a private limited company. Choosing and registering a business name, choosing directors, nominating shareholders, and submitting legally essential documents, such as the Memorandum of Association and Articles of Association, are the steps that are part of the process of registering a corporation with Companies House. While the cost of registration is cheap, the process is quite lengthy and tedious.
  • Stringent Regulatory Compliance – A major counterpart of the advantages of a private limited company is the range of regulatory compliance a private limited has to adhere to. A private limited company has to adhere to a wide range of legal and regulatory requirements. It also includes filing annual financial statements and maintaining corporate governance standards. Navigating this regulatory landscape can be time-consuming and resource-intensive.
  • Public Scrutiny – A major disadvantage of a private limited company is that investors, rivals, and other third parties are free to review your company records that are kept at Companies House. This makes it more difficult to keep information about ownership transfers, turnover, and other big business changes secret, which could give your rivals an advantage.
  • Greater Need for Administrative Efficacy – Three categories of legally mandated records must be kept on file by private limited companies:
    • Records of the company's operations, including voting choices, director and shareholder lists
    • Financial documents that detail every transaction
    • Records belonging to influential people 

In addition, you must pay corporation tax, submit accounts, keep correct business records, and abide by all applicable laws, rules, and regulations. Your company's expenses may increase if you have to think about hiring a company secretary to manage those responsibilities if the workload becomes too heavy.

  • Limited Control – A private limited company comes with multiple shareholders. Consequently, the decision-making process can be quite complex. The one who starts or opens the private limited company can have their role diluted, as the majority of the decisions of the company are taken by the consensus of the shareholder majority.
  • Financial Reporting – A private limited company has to keep correct financial records and submit them to Companies House and HMRC after the fiscal year ends. This entails following accepted accounting standards while creating and submitting a complete set of statutory accounts or a condensed set. A sole proprietor only needs to submit a Self-Assessment Tax Return with a profit margin and an itemised breakdown of their revenue and expenses.

Points to Keep in Mind While Setting Up a Private Limited Company

Now that you know the advantages of a private limited company as well as the disadvantages, here are some points to keep in mind if you are planning to start a private limited company –

  • Make sure you have a comprehensive business plan. A well-defined plan is the roadmap to your company’s growth and expansion. It should lay down the business goals, target market and growth strategy.
  • Diligently go through a registration process, and ensure that all legal and regulatory compliances are taken care of.
  • Decide what would be the share capital and how many shares are to be issued. To ensure that there are no conflicts in the future, draft a robust shareholder agreement.
  • Implement an efficient accounting system and do strategic tax planning to optimise the financial health of the company. For this, you can take the help of expert accountants in London.
  • Put operational processes in place and protect your intellectual property through patents or trademarks.
  • Be it employees, suppliers, or clients – create robust contracts which clearly outline all the terms and conditions, without any ambiguity.

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