Advantages and Disadvantages of Private Limited Company
Plenty of thoughts go around the mind of businesspersons while setting up a Private Limited Company. Considering the benefits and involved risks is a smart move before laying the foundation of your small business. These Advantages and Disadvantages of Private Limited Company are worth considering before executing the plan.
What is a Private Limited Company?
A private company is owned and operated by a small group of individuals who provide capital. A privately-owned business can either be small scale or medium type. It’s more flexible in terms of operations because a few owners are involved.
What are the Advantages of Private Limited Company?
Provided a private company is formed following the necessary legal measures, it offers many benefits such as legal protection and limited liability to its shareholders. Following are the Advantages of Private Limited Company in details.
1. Private company is a closely-held entity
A private company is held closely as the shares can be sold or transferred to other people as per the owner's decision. Shares of private limited companies are owned by directors, founders, management, or a group of private investors.
Shares are sold in a closed market, which means there are fewer shareholders. This reduces the risk of ambiguity and confusion in decision-making and management.
2. Private limited company requires less paperwork
Fulfilling legal formalities can be both time-consuming and costly, especially when planning a public limited company. One of the main reasons is that the company has to comply with the list of protocols and guidelines in order to operate as a PSU.
On the other hand, a Private Limited company has a comparatively shorter list of formalities, one of the key advantages of private limited company.
3. Business privacy- one of the advantages of private limited company
It's mandatory for a public company to disclose its working process, financial reports etc., to the public whenever required. This may be due to a direct role and intervention of the government or public either through investment or management. On the contrary, private companies are not subjected to any such obligation as they can operate privately and are liable to pay taxes only.
4. Suitable for startup business
In many countries, government assist micro-businesses and small businesses with loans and other lending options. Certain exemptions to startups are why people opt for a private limited company with very little effort. Provided there is much less paperwork and laws to establish a private firm; entrepreneurs get many benefits in terms of cost-savings.
5. Limited liability
Limited Liability means that the company owners are not personally liable to pay debts of the business. In case of business loss or failure, owners are only accountable for the unpaid shares of the company's capital.
What are the Disadvantages of Private Limited Company?
There are risks involved with every type of business. Even though there are various benefits of a private company, you need to consider the following disadvantages of private company as a businessman.
1. Formalities may take times
Even though there are less paperwork and formalities to follow in private company, the process can be complicated for those who don’t seek assistance from professionals or business consultants with the registration. If you don’t have the proper knowledge, you may need someone with professional knowledge to get it done.
2. Divided ownership- one of the common disadvantages of private limited company
Having shareholders and multiple owners involved, running a private company can be difficult as there are chances of a conflict. This means any decision that has to be made by the number of votes from owners.
3. Limited personal control
Several people invest in a private business entity and having multiple owners also mean an individual will have less control over the company. Personal control also weakens as other stakeholders will also have equal rights and power in the decision making.
4. Restriction in the transfer of shares
A private limited company is formed by a closed group of investors or individuals. This means, hence the entry of outsiders is restricted. The newly issued shares must be offered first to the existing shareholders before the outsiders can invest in them.
Similarly, the board of directors get to decide whether to transfer the shares to any third party or not. This limitation is counted among the common disadvantages of a private limited company.
5. Restricted access to the stock exchange
Private limited companies cannot issue their shares to the public in huge numbers as the maximum number of shareholders in a private limited company is limited.
Given that only the shareholders have to right to issue company shares, they decide who should subscribe to its company’s shares. Also, if you wish to avail of the benefits of the public issue, the company has to be incorporated as a public limited company.
Conclusion: Advantages and Disadvantages of Private Limited Company
If there’s much to concern about the private limited company first and foremost, it’s the restriction to the stock exchange. Weighing the advantages and Disadvantages of a Private Limited Company, less complexity & expenses, and time consumption are a few factors that are worth mentioning. Finally, taking a second opinion from a professional can help you save much more in terms of time and money.