Private Limited Company definition is a type of business whose shares are not traded on the stock market and can only be sold with the consent of the other shareholders.
In the UK, Private Limited Companies are the most common type of business setup. Shareholders who invest in the organization share the ownership. These shareholders have limited responsibility and receive a share of the yearly profits. The designation ‘Ltd.’ appended to the company name serves as a hallmark of this entity.
Creating a Private Limited Company in the UK is flexible in terms of size and industry. It covers various fields like services, retail, manufacturing, and digital businesses. For example, professionals such as painters, doctors, web designers, metal fabricators, and grocers can all come together under the ‘Ltd.’ umbrella.
The spectrum spans from solitary proprietors with no workforce to expansive corporations boasting substantial multi-million-pound turnovers.
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What does "Private" mean in Private Limited Company
Since we now know what is a Private Limited Company, it is also important to now what is term “Private” means. This term means it’s owned by the founders or a specific group of private investors. To be part of a UK Private Limited Company, potential shareholders need to be invited to buy shares.
As we now understand the definition of a Private Limited Company it is also important to distinguish Ltd. and Public Limited Company (PLC).
A PLC is led by directors and owned by shareholders. Their shares are open for the public to buy and sell. Unlike partnerships and sole traders, a PLC stands alone, shielding it from debts. Shareholders are only responsible for losses up to the value of their shares.
Public limited companies have a special advantage. They can gather money by selling shares to the public, and these shares might even be listed on stock markets. Organization channels surplus income to shareholders as dividends. It’s important to know that public limited companies need to have at least £50,000 of shares issued, and a quarter of that must be paid. Private limited companies don’t have this minimum capital rule.
- Public companies’ ability to publicly offer shares.
- Public companies mandating 2 directors, as opposed to a single director for private companies.
- Public companies can’t agree to do work or provide services as a way to get shares.
- Prohibition of public companies from purchasing their own shares from capital.
- Compulsory appointment of a suitably qualified company secretary for public companies.
- Public companies have to file their annual accounts within 6 months, while private companies have 9 months.
- Public companies have to hold yearly general meetings, but private companies usually don’t need to do this.
Advantages of a UK Private Limited Company
1. Limited Liability:
2. Distinct Corporate Identity:
3. Professional Validation:
4. Enhanced Funding Prospects:
5. Tax Advantages:
6. Versatile Business Landscape:
7. Branding Amplification and Corporate Identity:
8. Insulation from External Influences:
9. Shares, Trade, and Capital Generation:
Shareholders in a UK Private Limited Company have the freedom to sell their shares and exit the business. This allows them to avail from the firm’s success. Limited liability status reduces risks and therefore attracts investors and creditors. The option to sell shares is a valuable fundraising tool. This distinguishes Ltd. from sole entrepreneurs.
In general, the formation of a Ltd. in the UK offers various advantages. They cover legal guarantees, financial benefits as well as operability. This structure raises the business to a high level of trust and encourages growth.
Disadvantages of Private Limited Company in the UK
1. Disclosure of Personal Information:
2. Stringent Record-Keeping Protocols:
3. Name Limitations:
4. Challenges in Fund Withdrawal:
5. Payment Complexities:
6. Setup and Termination Procedures:
How Does Registration Work for a Private Limited Company?
1. Check it is right for you
- self-employed (‘sole trader’);
- a business partnership;
- a social enterprise;
- an overseas organizations;
- an unincorporated association.
2. Choose company name
Second: Check if the chosen name is available. You can do it online at the government website.
3. Choose director and a company secretary.
Company director
The organization must have at least one director. The director is legally responsible for managing the firm and ensuring proper preparation of accounting reports.
A director must be 16 or over and not be disqualified from being a director. Directors do not have to live in the UK but firms must have a UK registered office address.
Directors’ names and personal information are publicly available from CH UK. Directors must provide a service address (or ‘correspondence’ address), which will also be publicly available. If they use their home address, they can ask CH UK to remove it from the register.
Company secretaries
You do not need a secretary for a Ltd. Some companies use them to take on some of the director’s responsibilities.
Secretary can be a director but cannot be: the company’s auditor, an ‘undischarged bankrupt’ – unless they have permission from the court
4. Decide who the shareholders are
You need at least one shareholder or guarantor, who can be a director;
and identify people with significant control (PSC) over your company:
Most PSCs are those who hold:
- more than 25% of shares in the company
- more than 25% of voting rights in the company
- the right to appoint or remove the majority of the board of directors
5. Prepare documents
You need to prepare a ‘memorandum of association’ and ‘articles of association’.
Memorandum of association
If you register your company online, you don’t need to write your own memorandum of association. It will be created automatically as part of your registration.
If you register by post, use the memorandum of association template.
You cannot update the memorandum once the firm has been registered.
Articles of association
You can either:
- use standard articles (known as ‘model articles’)
- write your own and upload or send them when you register your business
6. Check what records you'll need to keep
Records about the company
- directors, shareholders and company secretaries
- the results of any shareholder votes and resolutions
- promises to repay loans at a specific date in the future (‘debentures’) and who they must be paid back to
- promises the company makes for payments if something goes wrong and it’s the company’s fault (‘indemnities’)
- transactions when someone buys firm’s shares
- loans or mortgages secured against the company’s assets
- details of assets owned by the establishment
- debts the company owes or is owed
- stock the company owns at the end of the financial year
- the stocktakings you used to work out the stock figure
- all goods bought and sold
- who you bought and sold them to and from (unless you run a retail business)
7. Register your companyep
- online
- town of birth
- mother’s maiden name
- father’s first name
- telephone number
- national insurance number
- passport number
- register by post
You can also register your firm using agent or third-party software.
Duties and Responsibilities of a Private Limited Company in the UK
1. Duty to act within powers (section 171)
2. Duty to promote the success of the company (section 172)
3. Duty to exercise independent judgement (section 173)
4. Duty to exercise reasonable care, skill and diligence (section 174)
5. Duty to avoid conflicts of interest (section 175)
6. Duty not to accept benefits from third parties (section 176)
7. Duty to declare interest in proposed transaction or arrangement (section 177)
1. Follow the company’s rules, shown in its articles of association.
While registering your business you need:
- a ‘memorandum of association’ – a legal statement signed by all initial shareholders or guarantors agreeing to form the establishment
- ‘articles of association’ – written rules about running the firm agreed by the shareholders or guarantors, directors and the company secretary
2. Keep records and report changes.
You must keep details of:
- directors, shareholders and secretaries
- the results of any shareholder votes and resolutions
- promises for the business to repay loans at a specific date in the future (‘debentures’) and who
they must be paid back to - promises the company makes for payments if something goes wrong and it’s the organization’s fault (‘indemnities’)
- transactions when someone buys shares
- loans or mortgages secured against the firm’s assets
3. File your accounts and your Company Tax Return.
4. Tell other shareholders if you might personally benefit from a transaction the company makes.
5. Pay Corporation Tax.
Conclusion
FAQ
How to appoint a director in a UK Private Limited Company?
The organization must have at least one director. The director is legally responsible for managing the firm and ensuring proper preparation of accounting reports.
A director must be 16 or over and not be disqualified from being a director. Directors do not have to live in the UK but firms must have a UK registered office address.
Directors’ names and personal information are publicly available from CH UK. Directors must provide a service address (or ‘correspondence’ address), which will also be publicly available. If they use their home address, they can ask CH UK to remove it from the register.
How to value shares in a UK Private Limited Company?
There are two methods of shares valuing.
- Comparable Company Analysis (CCA)
It is the most common and simple method of valuing shares.
The process behind CCA involves using the metrics and performance of companies of a similar size in the same industry to try to draw valuation conclusions. This is done under the basic assumption that similarly sized businesses in the same industry will have similar valuations.
Company valuation ratios are a method of determining whether a business is overvalued or undervalued in the market based on whether the ratio is high or low. - Discounted Cash Flow Valuation (DCF)
This particular method aims to formulate a value based on expected future cash flow.
The purpose of DCF as a method is to estimate the possible future return on an investment, taking into account the time value of money, which states that money today is worth more than money tomorrow because you can invest money you have today today.
When it comes to DCF, the main drawback is that it relies too heavily on assumptions. It requires as accurate estimates as possible, when the market can always be prone to fluctuation, affecting future share value.
How to setup a Private Limited Company in the UK?
If you want to register a Ltd. In the UK there are 7 steps to setting it up:
- Check it’s right for you.
- Choose your company name.
- Appoint at least one director.
- Decide who will be shareholders. …
- Create your company documents. …
- Confirm what records you need to keep. …
- Register with Companies House.
What types of Ltd. are there?
A Private Limited Company in the UK can be divided into two categories.
Limited by shares
Limited by shares companies are usually businesses that make a profit. This means the company:
- is legally separate from the people who run it
- has separate finances from your personal ones
- has shares and shareholders
- can keep any profits it makes after paying tax
Limited by guarantee
Limited by guarantee companies are usually ‘not for profit’. This means the company:
- is legally separate from the people who run it
- has separate finances from your personal ones
- has guarantors and a ‘guaranteed amount’
- invests profits it makes back into the company
Who can set up a limited company?
Any individual of any nationality may register a limited company subject to a few conditions:
- They are not an undischarged bankrupt
- They have not been restrained by court order
- They are not subject to UK government restrictions
