Strategy

PLC vs LTD: The Difference, Advantages & Disadvantages

Cameron Fleming | 29 June 2021 | 3 years ago

Plc Vs Ltd advantages & disadvantages

Are you thinking of setting up a business and wondering what type to go for? Or maybe you are just looking to educate yourself on the differences between PLCs and LTDs? Whatever the reason you are trying to quench your thirst for knowledge we have delved deep into the advantages and disadvantages of both PLCs and LTDs.

Firstly, what is a PLC and a LTD?

PLC stands for Public Limited Company. A PLC designates a company that has offered shares of stock to the general public, moreover, the buyers of those shares have limited liability which means they cannot be held responsible for any business losses in excess of the amount they paid for the shares.

In the U.K, company law says that a Public Limited Company must have the PLC designation after the company name, for example, the oil and gas company, BP plc, and minimum share capital of £50, 000.

On the other hand, a limited company is an organisation that someone would set up to run their business. This means that each shareholder’s responsibility for financial liability is limited by the value of the shares that they own but have not paid for. Company directors of such companies are not responsible for business debts. In the UK, it only requires one person to form a limited company. The main difference is that the shares of a public limited company can be transferred freely on the stock exchange to anyone, a private limited company cannot sell shares this way.

Advantages of a PLC

To begin, let’s take a look at the advantages and disadvantages of a PLC

Growth and expansion opportunities – By having more finance than an LTD a PLC can pursue new projects, new products, or new markets and make a capital expenditure to support and enhance the business. A PLC can also make acquisitions (whether in cash or by offering shares to the shareholders of the target business) as well as funding research and development.

Prestigious profile and confidence – Having ‘plc’ at the end of a company name can add standing, reputation, and prestige. A sense of status comes with having a public limited company than its private company counterpart which can affect how the business is viewed.

Share capital for additional finance – The PLC has the ability to raise additional finance through share capital. This means Public companies can raise money via stock exchanges through an initial public offering by issuing additional equity shares. Also, the PLC could raise debt by issuing non-convertible debentures or bonds (unsecured bonds that cannot be converted to company equity or stock) In IPO and bonds, both retail and institutional investors can participate.

The shareholders have limited liability – This is a huge advantage for a number of reasons. Firstly, by protecting the shareholders from liability for the acts of the corporation, such individuals are willing to invest in the enterprise. Secondly, limited liability protects the personal assets of a shareholder from claims made against the corporation.

Increased negotiation opportunities – PLCs can get better deals! Increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale.

There’s an exit strategy – The going public can enhance the options for the founders to exit the business at some point in the future if they wish to do so. Both higher transferability of shares and the increased visibility of the business and its performance may increase the chances of bid interest from potential suitors.

Disadvantages of being a PLC

As with anything, there are also disadvantages you must consider before setting up a PLC. Some of these include, but aren’t limited to;

You need to lay down the cash first – PLCs can be very expensive to set up as you require a minimum set up cost of £50, 000.

Bigger legal requirements – To help protect shareholders, the legal and regulatory requirements for a public limited company go a little deeper than those of private limited companies. For example, additional restrictions/legalities include, but are not limited to obtaining a trading certificate from Companies House before the company can trade (there is no such requirement for a private company), the need to have at least two directors and AGMs must be held, whereas in a private company decisions can more often be made by resolution.

More complex accounting requirements – With a bigger company and even bigger start-up costs along with the involvement of shareholders, you can expect more complex accounting and reporting requirements.

Risk of a hostile takeover – The PLC lacks control when it comes to shareholders which would lead to potential problems. There is a greater risk of a hostile takeover by a rival company as the company cannot control who buys its shares.

Give the shareholders the profits – Shareholders will expect to receive a percentage of the profits as dividends.

A clash of opinions – Another issue that may arise with the PLC is that shareholders may clash when making decisions about the business, this could lead to a conflict of interest.

Advantages of being an LTD

Are you interested in setting up an LTD? Weigh up your options by reading the advantages below.

Minimising personal liability – The huge benefit of forming your own LTD company is the limited liability protection that comes with it. In layman’s terms, if your company runs into some financial trouble, your personal assets will remain secure. This is because a limited company is treated as a separate legal entity; a legal ‘person’ in its own right. The huge advantage here being the business is entirely separate from the people who own and manage it. So if the business goes bust, you shouldn’t. Any debt, losses, or legal claims associated with the LTD company are the responsibility of the company itself – not its owners.

Professional looking – Some businesses make the leap from being a sole trader to an LTD. This can lead the way to a more professional-looking image, and with looking more professional to the general public comes huge benefits such as attracting more clients and investors, accessing a wider range of lending opportunities, expanding into different locations or markets, and creating a valuable and trusted brand identity. You may also find that you would be competing on an even playing field with other businesses in your industry sector.

Better deals from the taxman – Are you currently a sole trader? If so, you will be paying more tax than an LTD. Sole traders pay 20-45% Income Tax on their profits, whereas Limited companies in the UK currently pay only 19% Corporation Tax on profits. Needless to say, this is a huge advantage to having an LTD and it also offers greater flexibility for tax planning. Moreover, if you set up a Limited company, you can reduce your Income Tax and National Insurance Contributions (NIC) by taking a combination of a salary and dividends. If you keep your director’s salary below the NIC Primary Threshold (PT), you will not have to pay any Income Tax or Class 1 National Insurance on those earnings. Furthermore, the company will not pay Corporation Tax on the salary, because wages are a deductible business expense.

Investment and lending opportunities – It is possible for Limited companies to have multiple owners, so if additional capital is needed, it can be raised by selling portions (‘shares’) in the business to new investors. Generally, Limited companies also have access to more lending opportunities than sole traders, and certain banks will only lend to incorporated businesses. Also, it is often possible to secure a loan for a company without the need for shareholders or directors to provide security against their own property.

Disadvantages of an LTD

Companies house – An LTD must be registered with companies house who will make the company information publicly available on their website. You will be required to pay an incorporation fee to Companies House. This means companies must provide the details of who their shareholders and directors are, as well as file a copy of their annual financial accounts.

Name restrictions – It’s not so easy naming a company. Company names are subject to certain restrictions. It must be unique – it cannot be the’same as’ or ‘too like’ the name of an existing company. It must end with “Limited” or “Ltd” and Certain characters, signs, symbols, and punctuation are not be permitted

A bad financial past can inhibit you – You cannot set up a limited company if you are an undischarged bankrupt or a disqualified director. So if your past looks anything like that then you might have to think twice about the skype of business you’ll be starting. 

Accountancy costs – Unless you are a real whizz with your accounts then it’s a very good idea that you hire an accountant for your limited company in order to deal with your taxes. It is not worth risking getting your tax calculations wrong or filing a tax return late etc. Some of the tasks that an accountant can do for you include, filing your company tax returns, paying your corporation tax, as well as filing your VAT returns (if applicable). This means that you will need to pay the accountancy fees, which can be quite steep, so try to find a good reputable accountant.

Your records aren’t private – Public records – If you like to keep your business aspects private then a limited company might not be for you. As a limited company owner, you have to register your business with the Companies House in the UK. This means that you provide information on company accounts, company records, company directors, and company shareholders. The information you provide to the Companies House is then published and can be accessed by anyone. This reduces the level of privacy a business has. If you trade as a sole trader, your privacy remains.

There are more than 4 million limited companies registered in the UK, and over 500, 000 new companies are incorporated each year so it’s safe to say people are fond of this type of business. Hopefully, after reading this you are a little clearer of the differences and advantages/disadvantages of the different types of companies.

Topic

Strategy

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