Most businesses in the UK prefer incorporating as a private limited company because of its advantages.
One significant advantage of a limited company is all your business liabilities and debts belong to the company, and you, as a founder, are in no way liable for them.
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It is further categorised as a public limited company UK and a private limited company.
Both come with unique benefits and limitations that confuse people about which one to choose as their legal business structure.
In this blog post, you will learn about the difference between a private and public limited company and their advantages and disadvantages.
By the end of the article, you will have a basic understanding of which one suits you the best.
Table of contents
● What is private and public limited liability company?
● Advantages and disadvantages of private and public limited liability company
● Conclusion
What is private and public limited liability company?
1. Public limited company
Directors manage a public limited company in the UK and can have multiple shareholders. You can freely sell and trade shares of the company in public.
Unlike partnerships and sole traders, this business structure exists separate from its owner and protects directors from company liabilities and debts.
Shareholders are not held responsible for any loss that exceeds the amount paid for their shares.
Some public limited companies in the UK are Tesco Plc and Barclays Plc.
It is the only business structure that can help you raise capital by selling company shares to the public.
Additionally, you can list the shares on the stock exchange. When these shares generate surplus income, you must share the company profits with all shareholders equally as dividends.
2. Private limited company
A private limited company is the most common business structure in the UK.
It acts as a distinct legal entity to its shareholders and directors, and all the profits, liabilities and business assets belong to the company.
River Island and Virgin Atlantic are examples of private limited companies in the UK.
Advantages and disadvantages of private and public limited liability company
1. Public limited company
Public limited companies have several advantages and disadvantages to consider before setting up your business structure. Listed below are just a few of them.
● Raising capital by issuing shares
Public limited companies can raise capital through the public issue of shares.
They can get loans from financial institutions by keeping their assets as collateral.
● Spreading risk
As a public limited company offers shares to the public, it spreads the risk of ownership among numerous people.
It allows companies to raise capital and use them for growth and expansion.
● More growth and expansion opportunity
These companies have less risk, which allows them to grow and expand by investing in different projects and products.
Additionally, banks offering loans for PLC and stock exchange listing will help improve your creditworthiness.
● Transferability of shares
You can buy or sell shares without the directors’ permission, known as the transferability of shares.
Investors are more attracted to public companies than private ones due to their restricted share transfers.
Read more: Legal overview for Setting up a Business in the UK
Disadvantages
● Complex regulatory requirements
They are subjected to more regulations than private limited companies.
It includes disclosing financial information and reporting requirements with the Companies House in the UK.
They must hold an Annual General Meeting every year with shareholders to vote on important matters.
● Vulnerable to takeovers
Public company shares can be bought or sold on the public market, making them more vulnerable to takeovers than a private company.
It means anyone with enough money can buy out a public limited company.
● High initial financial commitment
You must start a public limited company with a minimum of £50,000 of nominal share capital, and a minimum of 25% of it must be paid. Furthermore, you need to pay higher payments to legal and investment professionals.
● Short-termism
These companies focus on short-term profits as they are answerable to the shareholders every 3 months. Additionally, your company can be taken over if you don’t profit.
2. Private limited company
● Reduced personal liability
The company and shareholders are liable for any debts amounting to the value of their company shares.
● Reduced taxes
Private limited companies pay less tax than other business structures.
They pay corporation tax calculated on business income after taking off business expenses.
Additionally, the company can claim several expenses and save more each year.
You can use a limited company tax calculator to determine how much you must pay this year.
● Higher personal income
Private limited company shareholders can take benefits in numerous tax-efficient ways to pay themselves, like through dividends and tax-planned payroll.
● Continuity of existence
Such companies have a continuity of existence, meaning they will continue to exist even when one or more shareholders expire, retire, or leave the company.
● Higher credibility and trust
Private limited companies are subjected to more stringent legal and financial regulations, making them more credible and trustworthy than other business structures.
It includes mandatory audits, annual filings, and compliance with laws.
● Complex setup and management
Private limited company setup, including various legal and regulatory requirements, is complicated and time-consuming.
Also, managing such a company requires compliance with different laws and regulations.
● Limited control
Such a company is owned by shareholders who have limited control over the company’s day-to-day management.
It means the decision-making authority of the company is divided among several shareholders, which often leads to conflicts and disagreements.
● Limited flexibility
The private limited company is subjected to numerous restrictions and regulations compared to other business structures.
For example, transferring shares has restrictions, limited shareholders are allowed, and more.
● Higher costs
Handling private limited companies is highly expensive compared to other structures, as you must comply with company law and file accounts.
It includes conducting annual audits, filing annual reports, holding annual meetings, and more.
Conclusion
If you are starting a business or planning to incorporate your business as a limited company in the UK, public and private limited company structure is suitable.
However, depending on several factors, you need to tally them before choosing one, and this requires expert advice.
Quite often, a business fails due to a wrong decision in its initial years, and you must be careful about making a mistake.
Look out for accountants and other experts to discuss your business structure and carefully weigh their advantages and disadvantages to make an informed decision.