Private Limited Liability Company, Advantages and Disadvantages

Title: Advantages and disadvantages of private limited liability company.

Introduction

“Explore the key advantages and disadvantages of a private limited liability company (Ltd). Learn about its benefits, such as limited liability and professional credibility, and its drawbacks, including compliance costs and restricted capital raising.”

Contents

1. Advantages of private limited company
2. Disadvantages of private limited company.
3. Revision Questions.

See Also

• The formation of limited liability company
• Public corporations, advantages and disadvantages

Private Limited Liability Company

A private limited liability company (Ltd or Pvt Ltd) is a common business structure, especially in countries like the UK, India, and South Africa. It has distinct advantages and disadvantages, which are outlined below

Advantages of Private Limited Liability Company

1. Large capital: Private limited liability company can easily raise capital as a result of many shareholders that form the business.
2. It has legal entity: Private limited company has legal existence, hence it can Sue and be sued in its own name.
3. Shareholders have limited liability: In the event of business failure, the shareholder only loses his shares which he has contributed and his personal properties or assets are protected.
4. Continuity of existence: The chances of continuity of existence is high as the death or withdrawal of a shareholder cannot affect the existence of the company.
5. Efficient management: The business is efficiently managed by a board of directors appointed by the shareholders.
6. Large profits: Private limited liability companies do enjoy large profit because of their large size.
7. Possibility of expansion: The business can easily expand because of the large capital available to set up and run the company.
8. It enjoys internal economies of large-scale production: As long as the Enterprise is large, production can be carried out on a large scale, leading to economics of production) scale.

Disadvantages of Private Liability Company

1. Limited capital: As a result of few number of shareholders coupled with the fact that shares cannot be sold to the public, the capital available for use is limited.
2. Shares are not sold to public: The private limited company cannot sell its shares directly to the public. This acts as a limitation to the capital base and to expansion.
3. Shares not easily transferable: A shareholder cannot sell his shares without the consent of other shareholders.
4. Lack of privacy: There is lack of privacy as companies are required to publicize their account.
5. Payment of corporate tax: Private limited companies are usually required to pay corporate tax, unlike personal income tax paid by sole proprietorship and partnership.
6. Lack of personal contact: There is less personal contact with both the employees and customers, unlike in sole proprietorship and partnership.
7. Delay in decision taking: Before any decision is taken on any crucial matters, the board of directors or the shareholders must meet and this tends to Waste a lot of time.

This structure is often ideal for small to medium-sized businesses looking to balance limited liability with control but may not be suitable for businesses aiming for large-scale public investment or minimal administrative overhead.

Quick Revision Questions for Students

1. Outline five advantages of private limited liability company.
2. State five disadvantages of private limited company.