Several things come into mind when setting up a business or expanding your investment and registering it. Are you a company or a sole trader? Why would you care? Some of these questions can make you stuck between options. If you have ever found yourself in this situation, then you are in the right direction.
Reading this post means you have been trying to weigh the advantages of running a business as a private or public company. Or should you stick to sole proprietorship? As you must be aware, trading as a sole proprietor will not grant you any company benefits. Having a company is vital for sustainability, growth, and efficiency in all aspects.
In this post, you will learn about private limited companies and why you should set up one. Are you ready? Let us get going.
What is a Private Company?
A private company is a business setup owned by a group of private owners. The business can be small or large but does not offer its stock to the public; instead, they are exchanged privately within the shareholders, limited to 50 or fewer members. There are several advantages of private limited company in UK that make it familiar.
In most cases, these companies are held by the founders, private investors, or the management. In this setup, the shareholders claim part of the company’s assets and profits.
Families commonly own private companies, partnerships, sole proprietorships, and small to medium-sized businesses or SMEs.
What is the Differences Between a Private and a Public Company?
There are many differences between the two business entities. Below are a few of them.
● Fundraising: In private companies, there is no public fundraising since they withhold their shares to a small number of people, unlike the public companies, where they raise funds by selling their stocks to the general public.
● Obligations reporting: There must be a financial report and a director’s report at the end of every financial year for public companies. For any private company, you can prepare reports only if the business size is comprehensive.
● Dividend payment: in public companies, each shareholder has the same right to dividends, unlike private companies where the directors can issue dividends to any shareholder they wish.
Advantages of a Private Company in the UK
Several advantages make setting up a private limited company viable in the UK. Read on to find out some of these advantages below.
1. Tax Benefits
Unlike sole or partnership traders, private limited companies pay lower taxes in the United Kingdom. Companies pay corporation tax which has a lower rate, unlike income tax with which sole proprietors pay.
To add to the employee salary, a private company can also pay its shareholders dividends. Whenever a shareholder bags a minimum salary level, they are entitled to some state benefits without paying any employee/employer National Insurance Contribution (NIC).
Also, shareholders can take their remuneration as dividends which suffer less tax and are not subject to National Insurance Contribution.
2. Minimized Personal Liability
One of the positive facts of starting a private company is protecting liability. In other words, whenever your company encounters trouble, your assets are not used in an attempt to recover the losses incurred. A private company is a legal entity, meaning it has a separate legal right from the owner; it stands alone where rights are concerned.
Therefore, for any liability- losses, debts, or any legal claim regarding the business, the company is responsible for them and not the owners or directors. As a shareholder, you will only need to continue paying for the nominal value of your shares.
However, there are rare situations when the shareholders have to be responsible for the company’s liabilities. The cases may include fraud or any wrongful trading that may lead to a loss in the company.
3. Improved Professional Status
Running a private company exposes you to adverse professionalism. Whereas the structure and management of a private company may resemble a sole proprietorship, a private limited company is subject to close monitoring and higher regard to improving its impression compared to sole proprietor traders.
Accounting is complex with private companies, and depending on the size, reports might also be necessary. As a result, you’ll drastically improve your professionalism in the process of putting things right in the company.
Also, giving the company a professional look is beneficial in many ways like
● Attracting more clients,
● Accessing a comprehensive range of lenders,
● Creating a trustworthy and more valuable brand, among many other advantages.
4. Separate Legal Identity
A private company has a separate legal identity from its owners. Therefore, contracts are signed between the third parties and the company and not with the shareholders. Also, the company can survive in case of the death of one owner or director.
This means it’s easy for succession to take effect. Changing the management or the company’s directors isn’t a challenge. Also, the owners or shareholders are only liable to their unpaid stock or personal guarantees value and not all the companies liabilities. This gives perceptive security to shareholders or employees, unlike other company structures.
5. Easy Exit From the Business
Setting up a limited private company can allow you to sell it in the future if a need to sell it arises, a practice that is hard with other business structures.
With this type of company, the original owner can hand over the business and clear all the transactions to give way to the new owners. In return, they’ll receive some cash to fund a new business or their lifestyles.
Upon the sale of the company, the entrepreneurs’ relief against capital gains tax may be available to the owner.
Conclusion
There is a lot to enjoy in setting up a private limited company. Many businesses in the United Kingdom are private limited companies. Currently, setting it up is done online, unlike early days when you had to pay several visits to the Companies House to check if they are through with processing paperwork.
