29 January 2020
Thinking of setting up a private limited company? This guide covers what a private limited company is, the advantages, registration, and formation.
Setting up a private limited company is a pretty big step for sole traders and start-ups. This process can seem daunting for the uninitiated. Don’t worry, though, we’ve got you covered with this guide. We’ll take you through every step of the journey, defining what a private limited company is, discussing the advantages, and outlining how you go about registering and forming a private limited company.
Without further ado, let’s set the record straight on what a private limited company is (and isn’t). A private limited company is the most common form of organisation in the UK: according to government records, there were over 4 million companies of this type in operation here as of July 2019, accounting for 96% of all UK firms.
From the point of view of directors and shareholders, private limited companies are distinct legal entities in their own rights (they can be thought of as individuals that are detached from those who work for and own them). This means that, in the event of any legal trouble, it’s the company itself and not the directors or owners who are being sued.
If a private limited company goes bust, the directors’ financial assets are safe beyond the shares they own in the company. For other shareholders, their liability is limited to the value of the shares they hold in the business, so they don’t stand to lose any more than this either. It is this characteristic of a private limited company that gives it its name.
To get a fuller understanding of what private limited companies are, you might find it useful to compare them with public limited companies. The similarity between these two types of company is that they are both owned by shareholders who invest in them. To hold shares in a private limited company, you must be part of the company; public limited companies, on the other hand, can sell shares to members of the public.
There are loads of technical differences between the two types of company:
So, you’re currently working as a sole trader or start-up and haven’t yet registered as a limited company. Why would you bother? Isn’t it just going to be more hassle once you have to submit company accounts every year?
As we briefly discussed above, the main advantage of a private limited company is that your liability will be limited. Sole traders are responsible for their businesses. In this case, the owner’s private assets are in danger if the business gets into debt and they can also be sued on a personal level for the actions of the business. Directors of private limited companies don’t face these issues.
Private limited companies are also better for tax reasons. Sole traders pay tax on all of their profits over the personal allowance threshold, which is currently set at £12,500. Private limited companies only pay Corporation Tax and tax on dividends.
Corporation Tax is currently 19% of all profits but is set to be reduced to 18% after 1st April 2020, so it’s less than the lowest personal income bracket rate of 20%. Dividend tax is only paid on funds that are withdrawn from the company as dividends. Up to £50,000, the rate is just 7.5%. This increases to 32.5% for up to £175,000 and 38.1% for anything above this.
If your company requires significant investment, you may even want to think about becoming a public limited company. This will allow you to sell shares and build up capital quickly, although there are the public limited company obligations discussed above to consider.
You can begin the process of becoming a private limited company by registering your business with Companies House online. Only the director of the company will need to become a shareholder at this stage, but you will have to specify who your shareholders are. To do this, you’ll need at least three pieces of information about each shareholder from the following:
Your share structure is a pretty important aspect of the registration process. Firstly, you’ll need to decide a value for your share capital – this is the total value of all of the shares that your company issues. Next, you’ll choose how many shares to issue to each shareholder and the value of each share. You could, for example, issue 1000 shares at a value of £1 each, resulting in a total share capital of £1,000.
The proportion of shares owned by each of the shareholders is significant and will have implications for your firm down the road. When you come to pay out dividends at a later date, these must be paid out to all shareholders in proportion to the number of shares each of them owns. If a shareholder owns 500 of the 1,000 total shares in your company and you pay out £1,000 in dividends, they will need to be paid £500.
Think long and hard about the name of your company before you go ahead and register it. Clearly, it can’t contain any existing trademarks or references to other companies and must be unique to you. You’ll also need to choose a registered address for your company, which could be your own residential address, your accountant’s address, or the address of your business premises.
On a technical side note, you’ll be asked to create a Government Gateway user ID and password when you register your company. This needs to be different from your personal Government Gateway ID. Once you’ve registered, make sure that you register for Corporation Tax within three months.
Now that you’ve registered a private limited company, there are a few further steps to take at the beginning of your journey.
Based on the shares that you issued during registration, you’ll need to keep a record of all ‘People of Significant Control’ (PSCs). Any shareholder who owns 25% or more of the shares in a private limited company is classed as a PSC. Each year you’ll have to submit a Confirmation Statement to the government, part of which keeps them up-to-date on changes to your company’s PSCs.
You must set down your company’s Articles of Association at this point. Whilst this might sound scary, it’s really nothing to worry about. It’s just a document that outlines directors’ powers, the distribution of dividends, shareholders’ influence on decision-making, and voting rights. The government has provided loads of examples and help on this, which you can find here.
We established earlier that you don’t need to employ a company secretary as a private limited company. That said, there are certain advantages to doing so at an early stage. Employing a company secretary lightens the directors’ workloads.
The company secretary’s job is to maintain records, submit Confirmation Statements, communicate with Companies House, and arrange meetings of company directors and shareholders. They can also sign documents on behalf of the business where required, such as when dealing with VAT, insurance, and other administrative tasks.
Hopefully this guide has given you all of the information you needed to know about setting up a private limited company. If your business needs office or workshop space, contact BizSpace for competitive prices and flexible renting options.