This guide will cover the pros and cons of a private limited company, plus the main things to consider before making the leap. We’ll also focus on the step-by-step process of how to set up a limited company.

A limited company is one of the main ways entrepreneurs choose to structure their businesses in the UK. It’s classed as a legally separate entity to the people who own and run it. This means the company’s accounts are ringfenced and kept separate from the owners’ personal finances.

The separation of business and personal finances is one of the key advantages of a limited company. It gives entrepreneurs something called ‘limited liability’. This stops them from being held personally liable for business losses – or if the firm is sued.

Sole traders, in contrast, don’t have this protection. Instead, there is no division between their personal and company finances, making them responsible for any losses.

Other common features of a private limited company include:

• directors. You’ll usually need to appoint at least one
• shareholders or guarantors. Again, a minimum of one is typically required
• corporation tax payments. This is different to sole traders, who generally pay income tax instead
• Companies House registration. You’ll need to officially register your business’ name and address.

A private limited company offers a variety of potential advantages. These include:

Limited liability and asset protection

No business is certain to succeed. An economic downturn or one-off event may leave you counting heavy losses – and even force your company to close. Disgruntled clients could further jeopardise your financial stability by launching legal action.

It goes without saying that all these scenarios are highly unwelcome, with the potential to cause significant stress. The good news? By siloing your household and business finances, a limited company would protect your personal assets should the worst happen. 

Thanks to limited liability, you’d only be responsible for the face value of your shares. All other personal assets would be safeguarded. In comparison, a sole trader might have to use their own money to cover legal expenses, debts or losses. Since their personal and business finances are entwined, this could threaten their savings or home.

Tax efficiencies

It’s also worth researching the potential tax benefits of a limited company. A key difference between sole traders and limited companies is the type of tax they pay on their profits. While the former face income tax, the latter pay corporation tax instead.

Corporation tax rates can be lower than those for income tax, giving you the opportunity to make efficiencies. However, since each business is different, it’ll ultimately depend on factors like your income, plus how you take money out of the company. For example, through a salary, dividends or loans.

Talking to a professional could also help you explore specific tax rules around pensions and car ownership.

Enhanced public image

Limited companies often face tighter rules and restrictions than sole traders. For example, you’ll need to register with Companies House, file annual accounts with shareholders, and publicly list an address.

At first, all these regulations might feel like hard work. But they offer the chance to boost your reputation over the long term. After all, prospective clients should welcome additional safeguards and commitments to transparency.

Stronger brand protection

Once you’re all set up, other registered companies won’t be able to use the same business name. This should prevent customer confusion and ensure other firms don’t profit from your hard-won reputation.

Extra opportunities to raise capital

Limited companies have the power to sell shares, allowing new investors to buy a stake in their business. This popular way of raising capital isn’t open to sole traders.

Business loan applications may also be more straightforward for registered companies due to the higher standards expected of them.

Build links with other businesses

Larger businesses may require suppliers to have limited company status. So, making the switch could lead to new opportunities if you plan to supply other firms.

Of course, it’s useful to weigh up both the pros and cons of a limited company. Here are some key considerations and potential disadvantages of a limited company to bear in mind:

Legal and reporting duties

Limited companies face a wide range of reporting deadlines. For starters, you’ll need to prepare full annual accounts and a company tax return at the end of each financial year.

You’re also required to maintain company, financial and accounting records. These include results of shareholder votes, details of outstanding debts, and share transactions.

Any failure to keep accounting records could result in a £3,000 fine from HM Revenue and Customs (HMRC) – or even disqualification as a director .

Extra admin and paperwork

Unlike sole traders, you’ll need to register your business with Companies House. You’ll then receive a ‘certificate of incorporation’, official company number, and formation date in exchange.

There are other vital pieces of paperwork to remember too. These include a ‘memorandum of association’, which confirms all shareholders and guarantors agree to the company’s formation. And ‘articles of association’, where directors and shareholders confirm the rules of the business.

Set-up fees and ongoing costs

You’ll pay a small set-up fee to register your limited company. This is currently set at £12. However, the long-term costs can be much larger. For example, you might end up hiring accountancy specialists to take care of financial reports. Or support staff to ensure you stay on top of record-keeping.

Things are generally simpler for sole traders. They handle tax through the annual Self-Assessment process and don’t face registration fees.

Tougher transparency rules

Limited companies also have greater responsibilities when it comes to transparency. For example, business letters, websites and order forms always need to include your registered number and office address.

You might face more scrutiny over your financial performance too. That’s because the yearly accounts you file with Companies House may be viewed by the public online. On the other hand, sole traders don’t have to worry about these disclosures.

Decided that this business structure is right for you? Here’s how to set up a limited company in five easy steps:

1. Follow the rules around company names. Make your business’ name as unique as possible. It can’t be too similar to other registered company names or contain offensive words.
2. Gather registration details in advance. Get everything you’ll need to register with Companies House. Key details include an official company address, and a ‘standard industrial classification’ (SIC) code to show what your firm does. Three or more pieces of personal information are also required (e.g. your town of birth or mother’s maiden name).
3. Find the right business bank account. Business banking accounts should prevent any blurred boundaries between your corporate and personal finances. Discover NatWest’s business bank accounts. Eligibility criteria apply.
4. Understand the role of shareholders. For businesses owned by multiple shareholders, it’s useful to understand their rights and responsibilities. For instance, will they need to vote on proposed changes to the company’s direction? You’ll also be asked to list each shareholder when you first register the business.
5. Remember your tax responsibilities. Limited companies pay corporation tax, which you can register for when applying to Companies House. You can also register for PAYE at the same time, to let HMRC know you’re an employer. Finally, you’ll be expected to register for VAT if your taxable turnover exceeded £85,000 during the previous 12 months.

Learn more about the set-up process

The structure of a business can shape how it operates, pays tax, collects financial records and reports accounts. It may also contribute to its long-term success. For these reasons, it’s not a decision you should ever rush into.

Comparing limited company advantages and disadvantages can help you decide if this is the best route for your firm. On the one hand, you could benefit from limited liability, an enhanced reputation and the opportunity to issue shares. On the other, you’ll have to consider the extra paperwork, reporting duties and transparency requirements expected of these businesses.

Keen to learn more about setting up a business? The NatWest Entrepreneur Hub has plenty of tools and resources to support your growth and development.

To explore our wider business banking services, simply take a look around or get in touch.