Private Limited Company Advantages

A Private Limited Company Advantages include:
You have Limited liability.
More flexible than Public Limited Company.
Easier to raise larger sums of capital.
Opportunities for bringing in more skills.

Limitation of Liability
In limitation of liability there is no variation between business cash and personal cash for any person self working as all business debts are the personal responsibility of the Sole Trader. The Advantages of Private Limited Company are that the Company is a separate corporate body and liability for payment of debts stops with the Private Limited Company, the owners, shareholders are not personally liable. The directors are only liable if they carry on to trade and incur liabilities after it becomes apparent the Limited Company is insolvent.

Lower Taxes
Lower business tax offered a Private Limited Company Advantages over self employment in recent years. The £10,000 tax free limit was terminated many years ago. Company tax rates have increased from 20 % to 22% for small Limited Companies over the previous three years compared with the basic rate tax for a Sole Trader which has reduced from 22 per cent to 20 per cent Incorporation does still offer tax saving Advantages dependent upon the net profit before tax.

Private Limited Company Advantages come from the flexibility of being capable to decide the amounts of salary and bonus taken compared with a sole trader whose basic accounts are subject to tax at fixed tax rates and upper limit.

There are vital Private Limited Company Advantages regarding tax liability compared to a sole trader where net income is below the higher earnings threshold.
For instance assuming the Limited Company net profit before salary is £30,000. A sole trader would pay income tax of £5,600 plus national insurance of £2,200.20, a total of £7,107.20.
If a salary of £5.025 is taken and the rest is taken in dividends a Private Limited Company would pay £5,272.30 corporation tax, after deducting the salary from net taxable profit and the sole trader now the shareholder would pay no income tax.

The Advantages enhance where net taxable profit is higher than the self employment upper earnings limit as money can be left in the business and therefore only subject to the 22 % corporation tax rate thereby avoiding the sole trader 40 % tax rate. Yes another possibility is to distribute the shares among family members to reduce the risk of 40 % tax.

Limited Company accounts and Sole Trader basic accounts
Sole trader basic accounts can be very easy as a formal accounting system is not required and can be reduced to simple lists of income and expenditure supported by documentary evidence of sales and purchase invoices, effectively single entry bookkeeping. Producing a balance sheet is optional. Due to the simplicity then an accountant may not be required saving a significant cost.

Limited company accounts have to use double entry bookkeeping to produce the year end accounts including a balance sheet with statutory notes and statements. Unless accounting software is employed to produce the company accounts in this format then accounting knowledge is required and an accountants fee may well be in the region of £500 to £1,000. An accountant is not essential for a small pvt ltd company but is the normal approach and offsets some of the tax advantages.

Additional financial considerations
Because a director is also officially an employee of the pvt ltd company this gives rise to a number of considerations in determining the extent of a private limited company advantages.

Pension contributions of a sole trader are personal and while may be deducted from the personal income liability do not form part of the basic accounts. The pension costs including any company contribution to a pension scheme by a private limited company is a deductible business expense as an employee cost.

Using a car for business purposes may have an impact. The sole trader basic accounts would include the business proportion of the vehicle running costs or the mileage allowance. If that vehicle is used by a director then that director is receiving a taxable benefit potentially resulting in a higher tax burden depending upon the type of vehicle as taxable benefits vary. An alternative may be to leave the company vehicle privately owned and the director claim mileage allowances rather than vehicle running costs.

Potentially small issues but there differences in the accounting treatment of deductible expenses such as charitable donations, entertaining expenses and use of home as office. A private limited company advantages consist of being able to claim such expenses as valid business expenses which would not be claimable in the sole trader basic accounts as treated as personal not business.

If the director and main shareholder have other associated companies then the corporation basic tax rate could be affected.

Administration, management and business standing
A sole trader basically pleases themselves with regard to the administration and management of the business. A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts, statutory books and management as stated in the articles of association. The duties of a director are more formal than a sole trader.

Forming a private limited company is an indication that a business is both serious, has a long term objective and is correctly managed. This psychological perception can increase the business standing of a business. In addition funding requirements are more likely to be met as the lender to a sole trader has to consider the absence of a balance sheet statement in the basic accounts and the financial influences personally affecting the sole trader. A private limited company advantages concern the published financial statements, protection of the financial position from personal influences and the option of increasing security by virtue of asking directors to provide additional personal guarantees.

A private limited company advantages over self employment also extends to long term finance. Companies tend to retain more funds within the business to meet future financial commitments which aids year on year growth, a more sustainable business and medium term profits growth over a sole trader.

Private Limited Company Disadvantages

You can only sell shares Privately.
More legal formalities than sole traders.
Not very flexible if expansion becomes possible.

Go to top

Public Limited Company Disadvantages

You have to Publish results.
Your business may become vulnerable to market fluctuations, which are outside your control.
If market conditions change during the floatation process you may have to abandon the float.
Greater need to conform to legal procedures.
The costs of floatation can be substantial and there are also ongoing costs such as higher professional fees.
You will have to consider shareholders interests when running the company - which may differ from your own objectives.
Others, for example. auditors have to look at your books.
Public companies have to comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance
Owners might lose control.

Back To Different Business Structures
Back To Theory Of Business
Back To Business Ample

Private Limited Company Disadvantages - Public Limited Company Advantages - Public Limited Company Disadvantages

Go to top