Company Formation

What are the advantages of a private limited company?

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There are a number of reasons why you might choose to set up a private limited company. Find out in this article the most important advantages of an LTD.

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Answer Adeosun
May 21, 22 · 4 min read
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What are the advantages of a private limited company?

A limited company is a company limited by shares or guarantees. Companies limited by shares can either be public (PLC) or private (LTD).

A private limited company (LTD) is, therefore, a limited liability company that is a separate entity from its directors, shareholders, or owners, is limited by shares, and its shares cannot be traded to the public.

This is the kind of formation for small companies.

Even though most startups and small businesses would rather be a lone wolf and set up as sole traders, there are a lot of benefits that come with setting up as a private limited company.

Let’s take a look at some of these to give a better idea of what it is all about:

  1. Separate Legal Entity - A Private Limited Company is a legal entity in its own right and the company's finances are separate from its owner's finances.
  2. Limited Liability – personal assets will not be at risk in the event of failure of the business. The shareholders' liability is limited to the amount, if any, unpaid on the shares held by them.
  3. Build Credibility – the credibility of a private limited company makes it easy to raise funds, borrow from financial institutions, be worthy of grants and woo investors.
  4. Confidence in the business – operating as a limited company often gives suppliers and customers a sense of confidence in the business; they perceive it to be more reputable and reliable giving you commercial advantages. Being a private limited company also makes your business look more professional.
  5. Tax reduction – there may be tax payment reduction when operating as a private limited company as you can file for corporation tax relief and other forms of legal tax reduction routes. Getting paid via dividends means you pay less tax since dividends are generally taxed lower and you do not have to pay NIC (National Insurance contribution) at all on dividends.
  6. Suitable structure for profit and charitable entities – a private limited company is suitable for companies planning to make a profit or not.
  7. Profits are shared as dividends only among the shareholders – shareholders share the profits made by the company through dividends and the payment does not have to be equal. The mode of payment would however have been clearly stated in the articles and memorandum of association.
  8. Does not need to commence business till they are ready – there is no legal requirement for the private limited company to commence business as soon as it is being incorporated. They can choose to start when they are ready.
  9. Uninterrupted existence – the death of a shareholder does not necessarily mean the death of the business as in the case of a sole trader unless the company is legally dissolved. 
  10. Shares are free and easy to transfer – a shareholder can transfer or sell his shares privately to the highest bidder freely whenever he chooses.
  11. Assets Ownership – the company can own assets differently from its directors or owners.
  12. Capacity to sue and be sued – the company is separate from its shareholders and as such can sue and be sued with no personal liability on the part of its owners, directors, or shareholders.
  13. No minimum capital required – there is no minimum capital required to set up as a private limited company. Each shareholder can choose the number of shares they are capable of buying. 
  14. Protection of business name and brand – once you have registered your company with Companies House, your business name and brand are protected from being copied or imitated by someone else.
  15. Pension set up – you can pay your company executives pensions before tax payment as a legitimate business expense. This means that you are being tax-efficient at the same time as you are benefiting your employees.
  16. Can be set up by a single person – one person can be both the director and shareholder or guarantor. This is why it is a suitable structure for small businesses that may not have the capacity to appoint a board of directors.

In conclusion, the advantages of setting up your business as a private limited company far outweighs that of a sole trader and should be thoroughly considered as an option to maximize profit as well as build business professionalism and longevity.

How to set up a private limited company?

Follow these steps:
HowTo step image

1. Choose a unique company name and the SIC code for your business type

Choose the company’s registered office address, names of director(s) and company secretary (if any), names of members, and names of persons with significant control

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