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What Is a Private Limited Company?

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What Is a Private Limited Company?

You have probably heard of the term private limited company—or LLC—before, but may not fully know what it means. If you’re looking for a business structure for your own company, you will need to know all about a private limited business. 

This article will provide you with a detailed guide of what a private limited company looks like, and the advantages and disadvantages of being one. Keep reading to find out more.

What Is a Private Limited Company?

A private limited business is a business structure that determines that a company is privately owned. This means that they are run by an owner or a set of shareholders (which is limited to 50). The owner or shareholders of the company are not allowed to publicly trade shares for ownership, instead only being able to reach out to people privately for this process. 

The Ltd label is mostly used according to this description in the UK.

What Is an LLC?

A limited liability company (LLC) is a US equivalent term for a private limited company. These types of businesses mean that an owner’s assets are not liable for bailing out a struggling company.

For instance, if an unlimited liability business needs to repay outstanding debts and have exhausted the business entity’s assets, their owner’s assets can be taken as a form of repayment. This does not occur with LLCs. 

To figure out the way an LLC works in more detail in regards to the flow and distribution of money for the company, you can visit corporatedirect.com.

Advantages of a Private Limited Company

If you are looking to start a company or are looking at business structures, what makes a private limited company more beneficial than being a sole trader or a public limited company? These are a few advantages a private limited business carries. 

Limited Liability

A private limited company, like an LLC, has limited liability. This is beneficial because, in the event of bankruptcy or severe financial loss for the company, the owner will not experience spillover effects into their personal finances. This applies to shareholders as well.

Continuous Existence

If a company is run by a sole trader, and the owner dies or is unable to continue leading, the company may be dissolved. This is because they would not be able to fill up the gap in ownership.

Private limited companies do not experience this difficulty. Even without the original owner being in charge anymore, the business can continue because of the law, and also because it has shareholders to continue managing operations.

Pass-Through Tax Advantages

A private limited company is considered a pass-through entity by the IRS, which means that the owners can list down the profits or losses in their personal tax returns. This immediately makes taxes lower for the company.

Increased Opportunities for Raising Capital

The ability of private limited companies to raise capital is significantly higher than sole traders or partnerships. This is because they can sell their shares to shareholders, even if it is not in a public trading form. Because investors are protected from any financial fallout of the company, they are more likely to want to get involved, too. 

Disadvantages of a Private Limited Company

Despite the many benefits a private limited company can bring, there are still some disadvantages along the way. These are the most common ones. 

Legal Requirements

The legal requirements of setting up (and maintaining) a private limited company are quite burdensome. This includes having to set up PAYE for payroll, producing tax returns for HRMC per quarter, and more. Not staying up to date with all the requirements you need to follow can result in fines. 

Restriction on Capital 

Even though a private limited company can raise capital by selling shares, the cap of 50 shareholders and the inability to advertise publicly results in restrictions on the amount of capital these companies can raise. 

Processing Owner Payments

Processing owner payments for a private limited company is more complicated than for sole traders. You cannot simply withdraw money from the company but will require a legal transfer of money in the form of a salary to an owner. To receive your salary, you will need to set up PAYE. 

Registering a Private Limited Company

If you are interested in becoming a private limited company, there are several steps you can take to do so. 

  1. Apply for a digital signature certificate (DSC), which acts as a digital personality of a business entity.
  2. Obtain a director’s identification number (DIN), which is also a digital identity that is merited to directors.
  3. Apply to the registrar of the company to find a legal company name.
  4. File a memorandum of agreement to be able to register as a private limited company.
  5. Obtain a permanent account number, tax account number, and a certificate of incorporation to make your company official. 

Becoming a Private Limited Company

Choosing to become a private limited company certainly does carry numerous benefits. This includes being able to raise capital, having limited liability, and experiencing tax advantages. There are, however, several disadvantages as well that limit a person’s ability to raise capital or to receive owner payments. 

Overall, the choice of setting up a company with a certain business structure will depend on the highest priorities of the owner. If you are more interested in maintaining most of the control over your firm, a private limited company may be less favorable than a sole proprietorship. On the other hand, if you think you will struggle with finances as a sole owner, a private limited company can solve this issue for you. 

Did you find this article helpful? Check out the rest of our blog. 

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