Joe DavidAdvantages and disadvantages of a private limited company
This comprehensive article examines some of the advantages and disadvantages of a private limited company. When starting a business, many people advise entrepreneurs to form a private limited company. This is mostly because it is a legal structure that is designed to give owners personal liability protection while they start a business.
What is a private limited company?
An important factor to consider when investors decide to open a business is the legal structure of the business. There is no doubt that setting up a private limited company is a very popular way to start running a business in the UK and many other countries around the world.
Private limited companies have limited liabilities. It means that all debts incurred by a company are the company’s liabilities and are not directly the legal liabilities of the company’s shareholders or directors (Rocket Lawyer, 2022).
Advantages and disadvantages of a private limited company
Advantages of a private limited company
A private limited company is a legal entity. It must have its own business bank account and its finances are separate from those of its shareholders.
Perhaps, the most important advantage of a private limited company is the limited liability. With a limited liability, shareholders can protect their personal wealth. Where necessary, someone can sue a company, but not its shareholders. As a private company has its own legal identity, its owners/shareholders are not personally liable for its debts.
Private limited companies are owned by one or more shareholders. These shareholders are often friends, acquaintances, and supportive family members. The profits made by these companies are distributed among the shareholders as ‘dividend’ (BBC, 2022).
It is relatively easy for a limited company to raise finance. The sale of shares and bank loans are often used to raise finance for a company.
One of the key advantages of a private limited company is that it has an unlimited life span. It does not cease with the resignation or death of its directors or shareholders.
Private limited companies are tax efficient as well. It is perhaps one of the main reasons why many investors like it. These entities usually pay a flat corporation tax rate. In addition, they can claim tax relief on different costs such as rent, phone bills, computer hardware & software, payroll, stationary etc. via business expenses.
Disadvantages of a private limited company
As a legal entity, a private limited company has a number of obligations. For example, it has periodic filing obligations and must pay the required fees (BBC, 2022). Likewise, private limited companies are not available for public trading.
A private limited company is more costly to set up than a sole trader. In addition, the accountant’s fees to file the company’s annual returns and others need to be taken into account as well.
While a private limited company may be inspiring for the shareholders as profits are only shared with them, it may be harder to motivate and control workers who do not hold shares; hence no dividend.
Examples of private limited companies
Millions of private limited companies are registered in the Companies House in the UK. These companies contribute billions of pounds to the UK GDP every year. Similarly, there are many in the USA as well. In fact, some of the U.S private companies are renowned around the world.
Examples of private limited companies can be found in all types of industries: hospitality, tourism, education, transportation, construction, retail, management services, and more. For example, a construction company can incorporate as a private limited company. Likewise, a transportation company can incorporate as a private limited company to avoid too many regulations and the public company structure.
Characteristics of a private limited company
These are a variety of characteristics of a private limited company. For example, it is a limited liability company owned by shareholders. If it fails, the shareholders are protected by the rules of limited liability. In the UK, there is no restriction on the maximum number of shareholders, and any value can be set for an individual share. Companies must have a UK registered office address.
Any individual or organisation can be a shareholder of a private company limited by shares. Shareholders are sometimes referred to as ‘members’ and they can also be the director/s. However, anyone wishing to be a director must fulfil some criteria. For instance, in the UK, the person must be 16 or over and not be disqualified from being a director (GOV.UK, 2022).
Concluding statement
Should a private limited company be formed? Well, it is up to the investors to decide whether this legal status is right for their business. Certainly, private limited companies are a great legal structure for entrepreneurs who want to share liability for any business debt. However, these companies are not for everyone as they have many disadvantages.
We hope this article ‘Advantages and disadvantages of a private limited company’ has been very helpful. You may also like reading How to write a business plan. Other relevant articles for you are:
Advantages and disadvantages of franchising
If you liked any of these articles, please feel free to share with others to support our academic work.
Last update: 10 April 2022
References:
BBC (2022) Types of business organisations, available at: https://www.bbc.co.uk/bitesize/guides/zpx7gdm/revision/5 (accessed 09 April 2022)
GOV.UK (2022) Starting a company, available at https://www.gov.uk/topic/company-registration-filing/starting-company (accessed 10 April 2022)
Rocket Lawyer (2022) Private limited companies, available at: https://www.rocketlawyer.com/gb/en/quick-guides/private-limited-companies (accessed 08 April 2022)
Photo credit: pinterest.co.uk
Author: Joe David
Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.
M Rahman