What is a private limited company?

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What is a private limited company?

It’s a company that’s legally separate from you, so you don’t pay its debts if it goes bust. And, though it usually has shares, they aren’t listed for the public to buy.

Basically, this is the type of company most people choose when they’re setting up their own business. The big attraction is that the law sees a limited company as (almost) a person in its own right. It can’t get married or serve on a jury, but it can own property, owe money, and sue someone in court.

Why ‘private’?

Because the company’s shares (if it has any) aren’t on public sale – unlike public limited companies, whose shares are listed on a stock exchange, and can be bought by anyone.

Why ‘limited’?

Because your liability is limited: if the company fails, there’s a limit to how much money you can owe. That’s one of the big advantages over being a sole trader.

There are two types of private limited company

For business folk, these really boil down to ‘the type you’d want’ and ‘the other type’. So, you can choose between:

A private company limited by shares (the type you’d want)

This is the structure most businesses use. The company’s owned and controlled by its shareholders. When you set up the company, you choose the number of shares, what they’re worth (their face value), and who owns them. Companies can (and often do) have just one share, worth £1, and owned by one person. And shareholders usually only risk the face value of their shares.

A private company limited by guarantee (the other type)

These are most often clubs or other non-profit organisations. The company’s owned and controlled by its members (officially called ‘guarantors’), who all have equal votes. Members guarantee that they’ll pay a certain amount of the company’s debts if it goes bust. You’re free to choose how much they guarantee to pay, so £1 is a popular figure.

For the rest of this article, we’ll assume that you’ve picked the first type.

Shareholders’ rights and risks

Imagine you set up a clock-repair company. You decide to create 100 shares, each worth £1. To begin with, you keep them all: you’re the sole director and the sole shareholder. Later, you give 20 shares to Elaine, your best engineer. Now imagine that, in the course of repairing Big Ben, your company completely destroys it. The business is liable for millions of pounds’ worth of damage and goes bust. How much is Elaine liable for? Just £20: the face value of her shares.

But what happens if you wind up your clock company after a long and successful career? If, after settling all its debts, it’s worth £1 million, what then? Well, Elaine owns 20% of that, so she gets £200,000. And while the company was ticking along, she would also have got 20% of any dividends it issued, and 20% of the votes in any decision made by shareholders.

What’s great about private limited companies

The main advantages compared with being a sole trader are:

  • It’s easier to bring in other people

    Giving people shares means they have an incentive to make the company a success.

  • There can be tax savings

    As a sole trader, if your income’s very variable, you can find yourself being a higher-rate taxpayer one year and barely using your full tax-free allowance the next. Having a limited company allows you to pay yourself the same amount each year – so you can keep money in the company in good years and use it in leaner times. That helps you to smooth out your personal earnings, which can mean you pay less tax. And if you fancy a sports car or a Tuscan villa, you can pay yourself a dividend.

  • You limit your losses

    This is the big one. You can set up a company without risking your house and savings if it goes bust.

Things that aren’t quite so great

These aren’t deal-breakers, but you should know:

  • There’s more admin

    Although setting up the company itself doesn’t have to be a hassle, there’s more paperwork for you to do over the year. (We get through it by listening to 80s hits on Spotify, but maybe that’s just us.) For example, you need to keep records of directors’ and shareholders’ meetings, tell Companies House if you appoint a new director, and complete corporation tax returns (as well as your personal ones). But you can employee people to do a lot of this for you.

  • It’s time to start thinking about VAT

    Whether you’re a sole trader or a private limited company, you don’t have to start charging VAT till your turnover reaches £85,000. But since many people set up a company to make their business look bigger, this is a good time to think about whether to register for VAT.

  • You have to add ‘Limited’ to the end of the company’s name

    Not a huge disadvantage, but you have to do it – though you can shorten it to ‘Ltd’. In Wales, you can choose the magnificently Welsh ‘Cyfyngedig’ (or ‘Cyf’) instead. And remember that your limited company also needs a unique name: it can’t be the same as any other registered with Companies House.

In a nutshell

So, there we are. The private company limited by shares is the most popular way to launch a business. If you’re already a sole trader, the biggest things to weigh up are VAT and the extra admin, though there are services to help with both. And if you’re not quite ready yet, it’s probably a good idea to register a dormant company with the name you want, so that no one else can take it.

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