Private Limited Company: Definition, Features, Advantages, Disadvantages – Penpoin

What’s it: A private limited company is a company whose shares are not listed on a stock exchange, have limited liability, and have a separate legal identity from the owners. Because they are not listed on a stock exchange, their shares are not traded to the general public.

A private limited company is common for a new company. They range from small to large-scale companies. Their initial capital may come from the owner’s money, the family, or from private equity.

When companies need additional capital to finance expansion, they can sell their shares to the public through the stock exchange. When done, the company turns into a public limited company. In addition, they can also raise funds by issuing debt securities such as bonds and medium-term notes.

Private limited company features

Formally registered. Businesses are registered as formal legal entities and must have important documents such as articles of association and taxation.

Separate legal entity. This business organization has a separate legal identity from its owner. The company’s finances are separate from the owner’s personal finances. Likewise, legal disputes or corporate debt problems are not the responsibility of the owner as a person.

Owner. They are known as shareholders. The company has at least one shareholder. They may be individuals, trusts, associations, or other companies.

Limited liability. Shareholders have limited liability. The company’s debt is not their personal responsibility. Thus, when a company goes bankrupt or fails to pay its debts, shareholders have limited liability. Shareholders’ personal assets cannot be taken to pay off debts. They simply lost the capital they had invested in the business.

Ownership. The owner’s interest in the company is equal to the number of shares they own. If companies distribute dividends, they receive a percentage of their shareholding.

Operation. Shareholders appoint the Board of Directors to operate the business and act in their best interests. The Board of Directors is responsible for business operations and makes all business decisions. And, sometimes, shareholders also serve as directors.

Double tax. Shareholders pay taxes on their income. And, businesses also pay corporate taxes. So, there is double taxation.

Private limited company advantages

Liability. Business organizations have limited liability. It allows protecting the owner’s wealth. In addition, the company’s debt is not their obligation as a person. So, they don’t have to sell their assets just to pay off the company’s debts.

Separate legal entity. Lawsuits against the company do not lead to lawsuits against shareholders because they are a separate legal entity from its owners.

Resource. Companies usually have a more organized business structure than a sole proprietorship.

Capital. In addition to capital injections from existing shareholders, companies can also sell shares or issue debt securities in the capital market. Thus, it is easier for companies to raise funds to support future growth. When a company sells its shares for the first time (called an initial public offering), it turns into a public limited company.

Continuity. The company continues to exist even when the shareholders change. Likewise, when a shareholder or director dies, it does not cause the company to die.

Control. The original owner can retain control. And their ownership is not diluted because the company does not sell its shares to the public through the stock exchange.

Confidentiality. The company has control over strategic and critical information such as financial statements. On the other hand, a public limited company must publish some such documents required by the regulator.

Private limited company disadvantages

Establishment. These business organizations are more difficult to set up and require more paperwork and requirements. Thus, regulatory costs (legal and administrative) are also expensive. In addition, in some countries, obtaining legal formalities can be time-consuming due to acute bureaucratic problems.

Dividend. Shareholders may not earn income from dividends. The company may not distribute dividends and reinvest them into the business (known as retained earnings). So, no money goes to the owner.

Complexity. Business operations are more complex and involve a lot of documents, including standard financial statements and taxation.

Transparency. The public or regulators find it more difficult to obtain information about companies, such as their financial statements. Unlike a public limited company, a private limited company is not bound by rules to publish such information.

Conflict of interest. Directors may pursue their own interests and profits, ignoring the interests of the owners. That’s because the business decisions are under the directors, not the owners, in contrast to a sole proprietorship where the business decisions are in the owners’ hands. That can then give rise to agency problems.

Transfer of ownership. Old shareholders find it difficult to sell their shares because they are not publicly traded through the stock exchange. They can only sell their shares with the approval of other shareholders. Likewise, new shares issued cannot be sold on the open market.