Private limited companies are relatively smaller limited companies.
Shares can only be transferred ‘privately’ and cannot be advertised for sale publicly. Private limited companies are often family businesses owned by members of the family, close friends and employees. The directors of a private limited company are often shareholders and are involved in the daily running of the business.
Advantages of a private limited company
Advantages of private limited companies include:
1. Limited liability. Shareholders have limited liability. As a result, more people are willing to invest their money.
2. Separate legal entity.
3. Continuity. Continuous existence in the event of the death of a shareholder as ownership is transferable.
4. Ownership. Original owner is still often able to retain control, and control of the company cannot be lost to outsiders as shares can only be sold to family members, friends or employees upon agreement of other shareholders.
5. Easier to raise capital. Able to raise capital from sale of shares to family, friends and employees, as there is no limit on the number of shareholders.
6. Possible TAX advantages.
7. Status. Greater market status than an unincorporated business.
Disadvantages of a private limited company
Disadvantages of private limited companies include:
1. Formalities. More complex legal formalities involved in establishing the business. It takes time and also costs money to establish a limited company.
2. Cannot raise huge amounts of capital. Capital cannot be raised by sale of shares to the general public. It restricts the amount of capital that can be raised.
3. Difficult to sell shares. Quite difficult and time-consuming for shareholders to sell shares as shares are not allowed to be sold to the public. If one shareholder decides to sell shares, it may take time to find another buyer.
4. Need to prepare final accounts. End-of-year final accounts must be sent to the government for inspection, so there is less secrecy over financial affairs.
5. Profit sharing. Profits need to be shared among larger numbers of owners.
6. Double TAXation of dividend.
Many manufacturing companies operating in the secondary sector of the economy are private limited companies.
