A private limited company is a type of business structure that can be used for various businesses, from small family-run operations to large multinationals.
This form of company has several advantages and disadvantages that need to be considered before making a decision.
In this post, we will discuss what is a private limited company, its advantages and disadvantages.
What is a Private Limited Company
A private limited company is a business structure that limits the liability of its owners to the amount of their investment in the company.
See Also: What is a Public Company | Formation of Public Company
It is one of the most popular forms of business entity and is the most common type of limited company in the United Kingdom.
Unlike a public limited company, a private limited company cannot offer its shares to the public.
As a result, it has fewer legal and financial reporting requirements and fewer restrictions on share transfers.
Advantages and Disadvantages of a Private Limited Company
Let’s check here below the different advantages and disadvantages of a private limited company.
Advantages of a Private Limited Company
Here are some Advantages of a private limited company.
Limited Liability
One of the key advantages of a private limited corporation is that the members have limited liability.
This way that in case the company faces any financial difficulties, the members cannot be held personally responsible for the amount outstanding of the company, as the liabilities are limited to their respective shares.
No Minimum Investment
A Private Limited corporation can be established without a minimum amount of money. Only $100 can be used to form a Private Limited Company as total authorized share capital.
Separate Legal Entity
A private limited corporation is considered to be a split legal unit from its members.
This means that the company can enter into contracts and conduct business in its name and with its resources.
Transfer of shares is Free & Simple
A shareholder may transfer their shares of a company limited by shares to any other individual.
Comparatively speaking, the transfer is simpler than the transfer of a proprietary concern or partnership-run company’s equity.
It is simple to transfer shares by completing a share transfer form, signing it, and delivering the share certificate to the buyer.
Professionalism
Setting up a private limited company requires professional advice, which results in greater credibility for the business.
It also reflects a commitment to success and helps the company appear more trustworthy and legitimate.
Perpetual Succession
A private limited company has ‘perpetual succession’, meaning that it does not cease to exist in the event of death, retirement, or resignation of any of its members. This continuity allows for long-term planning and growth.
Raising Funds
Private limited companies are allowed to raise funds by issuing shares and debentures and can raise larger amounts of funds than a sole proprietorship or partnership firm.
FDI Accepted
100% Foreign Direct Investment is permitted in Private Limited Companies, which means that any foreign business or foreign individual may directly invest in a Private Limited Company.
Tax Benefits
Private limited companies are usually taxed at lower rates than other forms of businesses, such as sole proprietorships and partnerships.
Additionally, there are various tax exemptions available for private limited companies, such as deductions for expenses related to research and development activities.
See Also: What is a Joint Stock Company | Features | Advantages & Disadvantages
Disadvantages of a Private Limited Company
Despite the advantages of forming a private limited company, there are also a few drawbacks to consider. The disadvantages of a private limited company include:
Complex Formation Process
Setting up a private limited company is more complex than registering as a sole trader.
The process of registering your business with Companies House and setting up a corporate bank account can be time-consuming and require the help of an accountant or lawyer to ensure you’re compliant with the law.
Cost
There are certain costs associated with running a private limited company, including the cost of registering your business with Companies House and accounting fees.
Additionally, it can be expensive to take on external legal advice or accounting services.
Personal Responsibility
As a director of a private limited company, you are legally responsible for its financial affairs. This means that if your company is in debt, your assets may be seized by creditors.
Increased Paperwork
Private limited companies are subject to more regulations than sole traders and partnerships, and so you will be required to complete more paperwork such as filing accounts with Companies House and submitting your corporation tax return each year.
Difficult to Raise Capital
Raising capital for a private limited company can be difficult, especially for small businesses, due to the number of restrictions placed on them.
Conclusion
A private limited company can be a great business structure for those looking to create a successful and profitable company.
See Also: What is Partnership Deed | Features of Partnership Deed
While it does come with its own set of challenges, the advantages outweigh the disadvantages, such as tax savings, limited liability, and easier access to financing.
When setting up a private limited company, it is important to understand the legal implications and requirements, as well as all of the associated costs and potential risks involved.
Ultimately, a private limited company can provide entrepreneurs with the structure they need to create a successful and profitable business.
