A private limited company is the most standard formal business structure you can choose.
A new or existing business can set up as a private limited company via the process of incorporation. Although the sole trader route, commonly referred to as being self-employed, is the most popular way of running a business in the UK, there are significant advantages to operating as a limited company, such as:
- Limited liability – running your business as a limited company means you have the reassurance of ‘limited liability’ so you will not generally be personally liable for financial losses made by the business. Practically speaking, if the company goes into financial difficulty, the assets and personal finances of its shareholders (owners) are protected beyond value of their shareholding.
- Tax – as director of a limited company, you are likely to pay less personal tax than a sole trader. However, your total tax liability may still be higher (particularly if your annual profit is initially unlikely to exceed £12,500). Please see the Taxation section (Limited Company taxes) for further details.
- Professional reputation – operating your business as a limited company often holds positive reputational value for a business.
- Financing – limited companies sometimes find it easier to secure business finance than other forms of business.
- Transferring ownership – it is much easier to transfer ownership (or a share in the ownership) of a limited company than it is for unincorporated business structures. This can be helpful if an owner dies or simply wishes to sell their share in the business.
The main disadvantage of operating as a limited company is the administrative burden. For example, annual accounts must be prepared to certain standards and submitted to Companies House on an annual basis. This and the other formal administration requirements can increase costs both at the set-up stage and throughout the running of the business. For further information, please click here.
How to set up a company
An entrepreneur can start a company in one of two ways:
- Set up a new company from scratch; or
- Buy an existing shelf company.
Setting up a new company from scratch:
To set up a company from scratch (‘incorporate’), certain key documents must be prepared and delivered to the Registrar of Companies at Companies House, along with a registration fee (£12 if you file online).
The details required are:
Application for registration;