The advantages of becoming a PLC

Cameron Fleming | 31 August 2021 | 3 years ago

The Advantages of becoming a PLC

Private limited company: advantages & disadvantages

When choosing your business structure, there is no “perfect” solution that can be recommended upfront. Your company’s structure depends on many factors, business and personal, which add up to the right, unique choice.

Factors that you will consider include future plans for growth, current profit margins, current and project tax threshold, the need for business partners, venture capital considerations, and professional image.

To put yourself in a position of strength to debate the advantages and disadvantages of becoming a PLC, we recommend that you work with an accountant and business consultant to draw up assessment strategies. Using professional specialists will clarify things and remove any confusion. By working through the decision in this way, you can be sure that you have made the right choice and will not be undoing things in the future.

Other professionals that can assist you are formation agents and a tax adviser.

Advantages of a private limited company structure

The leading advantages of a PLC are tax and financial liabilities.

Risk and liability – A PLC is a legal entity in its own right, the business is created and registered as a separate legal entity, and it is, therefore, separated from you personally. This allows you, the business owner, to keep your assets separate from the business itself.

This big benefit means that you will not be subject to any personal liability, as their work is undertaken as an agent for the company rather than as an individual. You will not be held liable, in your personal capacity, for any business debts or legal actions. If you were a sole trader, all the business debt would automatically be your personal debt and vice versa.

If your business runs into difficulties, debtors could target your personal assets if you are a sole trader. As a PLC, your personal assets will be protected by a “corporate veil”, whether it’s debt, losses, or legal claims – it will remain the responsibility of the company and the directors’, i.e. you, are protected.

Should there be a financial failure within the company, your liability will be limited to the value of the unpaid dividends on your shares.

It is important to note, however, that signing a director’s personal guarantee on a loan, lease or contract, is a personal commitment. If the company is unable to pay, the debt collection will be made against you personally. Loans for business vehicles or equipment, a credit line, or a commercial lease are examples of when a director’s personal guarantee might be called for.

If legal disputes do arise, the company can activate its insurance coverage or be sued if not covered. It is difficult, and indeed rare, for a director to be sued personally for a company’s wrongdoing under UK law.

Corporation tax – Tax is the other advantage of becoming a PLC – specifically corporation tax versus personal income tax. A PLC will pay corporation tax on any profits, but this will be at a fixed rate. As a sole trader, your tax rate will fluctuate in line with your income levels, and you will be susceptible to much higher rates of income tax under the personal income sliding scale.

PLCs will currently pay 19% Corporation Tax on profits, and a sole trader can expect to pay from twenty to forty-five percent Income Tax on profits.

A company gets full capital allowances on motor vehicles even if employees use them for personal needs. A car benefit can be made more cost-effective by the strategic selection of list prices and CO2 emissions of the vehicle.

Computer equipment and expenses can be provided to you tax-free if it is a requirement of your work.

Income tax – All available profits are not deemed to be personal income each year (sole trader), but a portion can be retained within the business as capital building for future operational growth and costs. In addition, in a PLC structure, you can use a combination of salary and dividends to reduce your personal Income Tax and National Insurance Contributions. You will not need to pay Income Tax or Class 4 National Insurance on personal earnings that are below the NIC lower profits limit.

The balance of your ‘salary’ can be taken from post Corporation Tax profits as dividends. No personal tax is due on the first £2,000 of dividend income (per tax year), and tax applied to dividends over £2,000 will be lower at a lower rate than Income Tax.

Whilst the private expenses of a director are treated as earnings, if that same director is a shareholder, these amounts can be treated as distributions.

You can receive different tax-free benefits and incentives, and the company will apply for tax relief on the cost of providing these.

Your mobile phones (1 per household) can be a tax-free expense if the contract is in the company’s name.

As a director, you can claim home expenses of £6 per week without receipts, or the company can reimburse you for light and heat expenses. The company may not reimburse you for mortgage interest or council tax.

Another option for directors is to set up a licence between you and your company for office rental within your home or outbuildings. If you use this methodology, then you can charge a proportion of mortgage interest and council tax to the rental bill. This income must, of course, be declared in your tax Self Assessment.

If there are multiple family owners of the business, then your accountant may be able to split income between these family owners and reduce tax commitments.

Profits – The tax advantages continue for a PLC as the company will be able to allocate far more costs to the tax-deductible category. This will be a big help in lowering your corporation tax bill each year.

Investment – As a smart, agile entrepreneur, you might find yourself at a growth crossroads where organic growth is not meeting the market demands. This is when you will need the ability to raise capital and encourage venture capitalists or shareholders to invest in your business. As a sole trader, you are a risky package; however, as a PLC, your business will have separated liabilities and will look more professional. This will imbue confidence in potential investors.

A PLC will also be able to raise capital via selling shares, and, as the company is separate from you, the director, the option of selling at a profit is permissible too.

Brand value – The intangible factor of perception must not be undervalued. A big advantage gained from a PLC structure is the impression it makes on potential clients, not only investors or financiers. There is an instant boost to your credibility and your brand’s gravitas. Having a more professional image will correlate directly to more business leads, higher profits, and a better calibre of clientele in the long run.

This greater respect from the market comes about from the general closer monitoring of PLC businesses, the statutory compliance obligations, and the public availability of information.

As with all things in life, there are always two sides to a coin. Let us look at the potential disadvantages of a PLC.

Disadvantages of a private limited company

The decision of changing your business to a PLC will bring some disadvantages that need to be factored into your assessment.

Administration – There are initial and ongoing administration implications. A limited business needs more time for its paperwork than a sole trader does, which can cause much eye-rolling from entrepreneurs. Such is the manner of the beast – with success comes growing administration.

The initial administration will need dedicated time set aside to achieve the paperwork for the formation of the business, such as choosing a company name, registering your business with Companies House, as well as notifying HMRC of the change, and registering for corporation tax.

If you are run off your feet, then it would be prudent to consider using a formation agent for the setup. There will be costs incurred from the agent, but these costs will be relatively small in comparison to the huge amount of hassle and time that the agent will save you.

The ongoing administration implications come from obligations such as the annual requirement that a Public Limited Company must file:

  • An annual set of accounts under the provisions of the Companies Act.
  • HMRC require full accounts for Corporation Tax which must be submitted online
  • Two separate annual returns:
    • A Corporation Tax return
    • A Personal Tax return, if a company director
Note: The accounts prepared cannot be DIY attempts. They must be prepared in accordance with accounting standards.

This disadvantage, however, feeds directly into the advantage of being seen as a more professional company and being a lower-risk entity. The administration might be more, but there are accountants out there who can help, and their costs are tax-deductible.

Business name – Your business name selection might be rejected as someone else has registered the name already. It is possible to do a pre-check on your shortlisted business names directly with Companies House directly (or use the formation agent).

Your registered office – The address you select to be your registered office address must be located in the same region in which you have incorporated the company.  This registered address, Director details, financial history, and shareholder details will all be available on public record when the PLC formation is complete. This means that the business’ financial difficulties will be public knowledge which is unlike a sole trader’s private accounts.

Accounting – Accounting and bookkeeping not only remains a good business practice but becomes a legal requirement. You cannot move money into your personal account on an ad-hoc basis. There are strict practices to follow when paying yourself or staff members. If you employ staff, then you must run payroll. It is, in the majority, necessary to hire a bookkeeper and an accountant to ensure the financial administration is compliant with legislation.

Legal Duties – As the director of a Private Limited Company, you do have personal protection to a greater degree than a sole trader. However, you will inherit a number of legal duties. One of the more demanding ones is the obligation to safeguard the company’s assets. Should it be deemed that you have failed to carry out this duty, it can result in a fine or, in extreme situations, a prison sentence.

The general protection of the aforementioned ‘corporate veil’ can be pierced by exceptions. A director will find themselves personally accountable in some obvious instances, e.g.:

  • If a director is found to have perpetrated fraud.
  • If a director is found to have committed tax fraud, deliberate tax concealment, or have knowledge of tax offences by Senior Accounting Officers or large companies.
  • If a director is found to have committed corporate manslaughter or violations under health and safety acts, environmental acts, companies acts, and listing rules.
  • If a director is found to have continued trading after the company is theoretically insolvent and, through these actions, has caused financial loss to creditors, then this could result in the director’s personal bankruptcy.
Costs– When you have ended your time as a business owner and wish to wind it up, there can be a lot of professional costs involved. As a sole trader, you can stop trading from one day to the next.

A general dissolution (ceasing to trade) comes with a lot of legal regulation compliance requirements, including the compliance requirements for asset liquidation, method of pay outs to creditors, debt collection, and, if there are partners or shareholders, the division of the remaining profits.  It is highly advisable to get the help of an insolvency specialist to make sure you tick all the boxes of compliance and have no future legal comebacks muddying your retirement.

There is no one-size-fits-all answer to choosing between a PLC or another business structure. It is highly dependant on your business plan and your personal goals.

Working with an experienced formation agent or an experienced accountant will mean all your questions about the advantages and disadvantages of a private limited company will get correct, legally compliant, and strategic answers.

If you enjoyed this article, you might also enjoy What’s the difference between a sole trader and a limited company.

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