When you’re considering starting a business, one of your first major decisions will be if you form a limited company or run as a sole trader. Every business type and preference on the structure of your business is down to your own opinion and what you feel comfortable with. However, we do advise that you research both the pros and cons of running a limited company vs as a sole trader.

In this article, we will cover all you need to consider if a private limited company is the best route for your business. If you're leaning more towards becoming a sole trader - be sure to check out our article which weighs up the pros and cons of being a sole trader.

What is a private limited company?

A Private limited company is a form of business structure where the business’s shares are split between the shareholders. The business will be run by directors who have responsibilities for running the business such as paying corporation tax. Corporation tax must be paid out of the profits from the business and then any remaining profits can be split between the shareholders.

The definition of a private limited company is “A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country”. A private limited company must be registered with Companies House.

In the eyes of the law, the private limited company is separate from its owners. This can be an advantage of owning a limited company which we’ll cover further in this article.

What are the minimum requirements to have a private limited company?

There are some important things you’ll need to have as a bare minimum to form a private limited company.

Registered office address

You’ll be legally required to have a main registered address/office for your business. This address is used for all government letters and messages so it must be an address that’s accessible to you and safe. There are certain rules to follow when it comes to your registered office address. The address must be within the jurisdiction where your work takes place (England, Wales, Scotland, and Northern Ireland). This address can be changed at a later date but must always be within the same jurisdiction. This address must be a physical place and cannot be a PO Box or a DX number.

Business name

This is where you can have some fun and get creative. You’ll need to choose the business name that your business will form under. Companies House has some rules to follow when it comes to choosing your business name.

• Your name must be unique to you. It cannot be similar or the same as an existing name of Companies House and you can use the Crunch name searching tool to check this.
• The name must not be considered offensive or rude.
• The name must not indicate any connection to the government or public authority.
• The name must not use any protected words unless the relevant authority has permitted you.

You can see the full Companies House guidance on their website.

Director

You’re required to have a minimum of one director to form your private limited company. The person that is appointed as a director has the responsibility of making the decision on behalf of the business and ensuring all legal requirements and deadlines are met. To be a company director you must be:

• Over the age of 16
• Not registered as Bankrupt
• Not disqualified as a director and within your disqualification term
• Not an auditor of the business

Directors can be added and removed at any time during the business’s life.

Service Address

If you’re the director of a private limited company, subscribers, People with Significant Control (PSC), and LLP members you’re required to provide a service address as a legal corporation. The address that you provide will be the contact address if HMRC or Companies House needs to get in contact with you regarding your role in the business you’re part of.

When setting up your service address, you can choose an address that is within the UK or overseas as long as it’s a physical address, and you cannot use a PO Box or a DX number. It can be the same address you’ve used for your registered office address but you can only give one address. However, the address can be changed anytime if needed. Be aware when choosing your service address, that just like your registered office address, this will be displayed on the public register for anyone to see. So choosing your home address isn’t advisable.

Member

A member is a person who owns the business. You must have at least one member for your business. They’re a shareholder or ‘guarantor’ depending on the type of business you’ve chosen. Private limited companies are usually owned by shareholders, with the business’s purpose to increase revenue and give any extra income earned, after Corporation tax has been paid, to the shareholders. Whereas when a business is limited by guarantee, the members of the business ‘guarantee’ to pay back into the business if it’s ever found to be in financial trouble.

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A Registered Email Address

Since 4 March 2024, all UK companies must provide a registered email address to Companies House. This address won't be public.

New companies: Provide an email address during incorporation.

‍Existing companies: Include an email address in your next confirmation statement (due from 5 March 2024).

Companies House will use this email to contact you about your company. You can use the same email for multiple companies.

You can change your registered email address online. Companies must maintain a valid registered email address, just like a registered office address. Failure to do so is an offence.

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Advantages of a private limited company

1. Less personal liability risks

If you register as a sole trader, you’re personally liable for all debts and financial obligations for that business. Whereas private limited company shareholders are only liable for any debts up to the value of their share in the company. So if you’re a sole trader and your company gets into some financial stress, your personal assets can be seized and you’ll be required to pay for the debts in the event the business crashes. But limited company shareholders have the protection of only being required to pay up to their share in the business.

This is also advantageous as in the eyes of the law you are a separate legal entity to the business you own or are a shareholder in, so if for any reason a financial issue arises and results in legal action, you’re personally protected and the business as a whole is responsible.

2. Reduced taxation

Limited companies pay less in tax than sole traders. Sole traders have to pay national insurance and income tax on any profits from the business, which is calculated from their annual Self Assessment. A limited company pays corporation tax, which is calculated on the business’s income, taking off any business expenses. Corporation tax rates are usually less than income tax rates, and limited companies can claim a wider range of expenses, saving their business more each tax year.

Directors of a business still have to pay income tax and national insurance contributions, but there are more ways to pay yourself from the business and this can result in likely paying less personal tax.

3. Gravitas

When you’ve registered as a limited company, some credibility comes along with it. As anyone can view your business on Companies House, it makes it easier for lenders or potential new investors to authenticate the company. This can increase your chances of funding as the higher profile is more attractive and builds confidence.

4. Access to funds

As we discussed in the previous section, gravitas can lead to an increased chance of funding. This also applied to bank loans, crowdfunding, and other forms of funding as investors feel more confident and comfortable when funding a limited company. The more funds received, the more flexibility the business has with money to invest in areas of the company such as marketing, advertising, employees, software, etc.

5. Business name protection

When you’re deciding on your business name, you’ll usually use a search tool to check if your company name ideas are in use or anything similar. When you register your private limited company, your business name will then appear in these search results for any new limited companies being formed after you. This means that your name is protected and cannot be used by another company as it’s registered on Companies House, and anyone who tries to register their company under the same name or similar will be refused.

6. Flexibility on your personal income

To add to all the other great benefits of forming a private limited company, you’ll also get more flexibility on the income you receive from the business. The way you do this is by paying yourself both dividends and a salary. Dividends have a lower rate of tax which will reduce your personal tax bill each year. You can also take bonuses, pension contributions, and many other payment routes when you’re a director.

We have articles that explain the UK dividend tax and a guide to taking a salary from your limited company. You could also give our dividend tax calculator a try to estimate the dividend tax you’ll pay on your investments. Sole traders pay themselves based on their business’s profits which they have to pay personal income rates on.

Disadvantages of a private limited company

So we've already covered the many advantages of setting up as a limited company, but now let's look at some of the drawbacks to make sure you can make an informed decision on what's best for you and your business.

1. Larger set-up costs

Setting up a limited company is a lot more in-depth than becoming a sole trader. There are lots of steps you’ll have to complete to register your business and these can take up a lot of your time, to begin with. Alternatively, you could pay an accountant to carry these tasks out for you, but this would also endure a cost.

Sole traders only need to register as self-employed on HMRC’s website.

2. Lots of admin

The burden that comes with running a private limited company is the paperwork and admin. It’s not rocket science that owning a large entity comes with more responsibility, but making sure you stay on top of this work, no matter how time-consuming, is vital.

To begin with, you’ll have the setup process which will involve forms and information to fill in. However, after the business is registered and running, there will be commitments throughout each tax year. To avoid spending all of your time focused on your financial and business admin, you could appoint an accountant to do this for you, or hire someone internally to handle this. You could also consider using accounting software, like Crunch, to speed the process along and keep you organised.

3. Open to the public

Although this was also included in the advantages under ‘gravitas’, having your records available to be viewed by anyone on Companies House can also be a worry. It leaves your company open for review from potential investors, employees, competitors, and others. Your company turnover, registered address, or directors are all available for viewing which can be frustrating if you want to keep important information confidential. It can also give your competitors access to information that you might not want them to see.

4. Changes to your business structure

It’s quite simple to move from a sole trader to a private limited company as you’d simply register your business.But, if you’re running a LTD company and want to change your business to make yourself a sole trader, it’s a long-winded process and you may need to consider the tax implications of closing your private company.

If you are planning to change your limited company to making yourself a sole trader, you’ll need to make HMRC aware immediately and set up your new structure. You’ll be able to get a guide on how to do this through HMRC.

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How to form a private limited company?

The first step you’ll need to take is to put together the minimum requirements (as we discussed earlier in the article) to form your limited company. You’ll also need to decide if you are limited by shares or by guarantee.

Next, you’ll need to decide on who your shareholders or guarantees will be. Be confident that the people allocated to these important positions are trustworthy and agree to the requirements and obligations.

Following this, you’ll also need to decide who your people with significant control (PSC) are. This will be anyone with voting rights or more than a 25% share in the business. HMRC has provided a full breakdown of what passes as a PSC.

Another important step is to create:

• Memorandum of association - This is a legal agreement signed by all shareholders or guarantors whereby they’re agreeing to form the company.

• Articles of association - Any written rules for the company signed by the shareholders, guarantors, directors, and company secretary.

To find out how to create a memorandum of association or an article of association, HMRC has provided a guide.

It’s also handy to look into the important records you’ll need to keep for your business and find a way to safely store these so they don’t get lost. In short, you’ll need to keep any records about the business itself and any financial and accounting records. HMRC has put together a full list for you to run through.

Lastly, you’ll need to register your company. This should be done through Companies House and then you’ll also want to register for Corporation Tax. These can usually be done at the same time.

Crunch formation service

Crunch wants to make the process of running your business and handling your accounting commitments easier. We know it can be confusing, which is why Crunch has a company formation service. Use our search tool for any ideas you have for company names to make sure yours is unique. Then simply fill in an online form, and we will register your business with Companie House on your behalf, so you can focus on building your new limited company.

Getting advice

If you need advice on the best company style for you, get in touch with our expert team. We have advisor support available for the Crunch software, to help you select the right Crunch subscription for your business needs, and real Chartered Certified accountants who can answer any pressing questions you might have.