A private limited company is a company with limited liability and non-transferable shares. In the event of a business collapsation, the assets of the owners or members are thus protected. However, it should be noted that this protection only applies to their shareholdings; any money owed by the business remains unpaid.
Since its inception in 1948, private limited companies have grown in popularity among sole traders and entrepreneurs.
This article examines why entrepreneurs prefer to form private limited companies.
What is a private limited company?
A private limited company is a company that is divided into shares that shareholders own. A corporation must pay corporation tax on profits and then distribute the remainder to shareholders. It is managed by directors, who are legally obligated to carry out specific duties on behalf of the company and its shareholders.
‘Limited’ means that the company’s financial responsibility is limited to the value of the company’s unpaid shares. It means that if a company has one member (shareholder) and they own 20,000 shares worth £1 each, they will be liable for £20,000 (if unpaid) when the company is wound up.
Reasons Why Entrepreneurs Choose Private Limited Companies
1. Flexible Management Structure
Private limited companies are famous for sole proprietors or small businesses that lack the resources to form a public limited company. However, this can be beneficial for businesses that want to keep control of their operations in the hands of a small group of people. Private limited companies give the owners complete control over the management of the business.
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2. Limitation of Personal Liability
A sole proprietorship’s owner is personally liable for all of the company’s debts. He is also personally vulnerable to judgments and lawsuits. Also, a sole proprietor may lose his home, bank savings accounts, automobile, and other personal assets in case of a lawsuit or debt.
An owner of an LLC, however, does not face this risk of personal liability. An LLC is a legal entity distinct from its owners. It is solely liable for its debts and legal entanglements. This means that the owner’s assets are protected if an employee, business partner, or company is sued for negligence. It is vital for owners with significant personal assets they want to protect.
3. Continued Existence
Unlike a sole proprietorship, a private limited business is a separate legal entity. Private companies can usually continue to exist after their owners die. This is different in a sole proprietorship, where the owners have complete control over all business operations. The absence of legal separation implies that the business will continue to exist as long as the owner does. However, because a limited company is structured similarly to a corporation, it will continue to operate even if the owner dies.
4. Tax Efficient
Because they can claim corporation tax relief on their profits, private limited companies are tax efficient. Businesses can save money and increase profits by doing so. Furthermore, private limited companies are permitted to pay dividends to their shareholders, which are taxed at a lower rate. Additionally, several other tax benefits are available to businesses, such as capital allowances and R&D tax credits.
5. Increased credibility
Regarding credibility and professionalism, a limited company gives you an advantage. Limited companies are thought to have more prestigious business statutes, which can assist you in getting off to a good start.
Indeed, it is common for larger organizations to specify that they will only work with limited companies or contractors operating through limited companies rather than sole traders.
6. Protecting your name and your brand
Once registered, your company name is legally protected. This means that another company cannot use your company name, which helps to protect your brand from incidents such as brand copying or imitation.
7. Restricted Trade of Shares
A limited liability company has restricted share trading. Restricting share trading is critical because it eliminates the possibility of a hostile takeover. Notably, in business, what is limited are the shares. Furthermore, shareholders are restricted in their ability to sell their shares. As a result, if a member wishes to sell shares, they must do so with another member. As a result, stock cannot be traded to outsiders.
8. Easier to Raise Capital
Raising Capital for a business can be difficult; however, since private limited companies are becoming more popular, they attract more investors due to their credibility. This gives them an upper hand while raising funds as investors see them as more trustworthy.
Overall, private limited companies provide several key advantages that can benefit businesses of all sizes. Companies that incorporate and follow the necessary formalities can benefit from limited liability, tax advantages, and increased business credibility.
Furthermore, raising Capital from shareholders and third-party investors is much easier with private limited companies. With all of these benefits, it’s simple to see why this business is so well-liked by entrepreneurs.