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PRIVATE LIMITED COMPANY

What is a Private Limited Company?

A private limited company, or LTD, is a type of privately held small business entity. This type of business entity limits owner liability to their shares, limits the number of shareholders from 2 to 50, and restricts shareholders from publicly trading shares.

Advantages

Let's look at some of the advantages of having a private limited company.

Limited Liability

One advantage of owning a private limited company is that the financial liability of shareholders is limited to their shares. Therefore, if a private limited company was in financial trouble and had to close, shareholders would not risk losing their personal assets. Although, perpetrating a fraud related to the private limited company would negate an owner's limited liability protection.

Restricted Trade of Shares

The restriction placed on the sale or transfer of shares may be considered an advantage or disadvantage, depending on your outlook. It is an advantage to some shareholders because shareholders who want to sell shares cannot sell them to outside buyers. Shareholders must also agree to the sale or transfer of shares; therefore, the risk of hostile takeovers is low. The restriction placed on the sale of shares is a disadvantage because shareholders have limited options for liquidating shares.

Continued Existence

Another advantage of a private limited company is its continued existence, even after the owner dies or leaves the business. Private limited companies are incorporated. When a business incorporates, it becomes an independent legal entity, meaning it is able to sue or own assets separate from the company owner. A private limited company differs from a sole proprietorship in that the latter is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence.

Tax Breaks

Private limited companies also enjoy tax advantages. For example, their corporate taxes may be lower than those paid by other types of businesses. Financial statements for private limited companies must be filed no later than nine months after the fiscal year ends. The first accounting period begins the same day that the business is incorporated. When pursuing tax advantages, private limited companies must keep accurate records.

Separate entity

In the eyes of the law, a limited company business is a separate entity to its owner. This is another great benefit of setting up a limited company, rather than a sole trader. A sole trader and its owner are seen as one entity. A limited company director has the protection, should the business fail. As the company is the separate entity, it can enter into contracts and is liable for all the business actions. A limited company director will have no attachment to the company’s actions apart from their share of the company.

The disadvantages of a limited company

With positives, there come some negatives. Here are the disadvantages of a limited company:

Complicated to set up

A sole trader it is pretty easy and straightforward as you only have to register with the Registrar of Companies. Whereas, setting up a private limited company will mean you will have to pay a fee for setting up. 

Complex accounts

Private limited company accounts can be complicated compared to other business structures. This will require the director to record information on the monthly basis. Some of the things that need to be covered are tax returns, business expenses and keeping the business accounts up to date. As the accounts for private limited accounts are quite complex, it is essential that you hire help. If you fail or make mistakes when filing tax returns and keeping a record of business accounts, you could face penalties.

Accountancy costs

It’s strongly advised that an accountant be hired for the private limited company in order to deal with your taxes. Some of the tasks that an accountant can do for you include, filing your company tax returns, paying your corporation tax, as well as filing your VAT returns (if applicable). This means that you will need to pay the accountancy fees, which can be quite steep. However, as a limited company, these costs are necessary to avoid paying penalties. To set up a limited company, you will need to complete the following documents to submit to the Registrar of Companies: Memorandum and Articles of association.

Ownership

A private limited company is likely to have shareholders, and those shareholders have a say in how the business is run. The way a sole trader is run as well as its general goals are all dictated by the owner. However, if a private limited company has multiple shareholders then their opinions and views need to be taken into account. Therefore, be prepared to share some decisions with your shareholders when running private limited company.

Shares not freely transferable 

 The other shareholders of the private limited company must agree if one shareholder intends to sell their shares. This can limit the shareholders' ability to sell their shares. 

Public records

As a private limited company owner, you have to register the company with the Registrar of Companies. This will mean that you provide information on company accounts, company records, company directors and company shareholders. The information you provide to the Registrar of Companies is then published and can be accessed by anyone.  This reduces the level of privacy a business has. If you trade as a sole trader, your privacy remains.



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