Advantages and Disadvantages of Private Limited Company: If you’re thinking about creating your own company, you know how tough it can be to find the right structure, with the most common difficulty being whether to Work as a sole trader or form a limited liability corporation (LLC). Making the wrong structure choice might result in a waste of time, money, and effort. Things that a new business owner typically lacks.
When compared to operating as a sole trader, incorporating a limited company has several advantages. We’ll look at these right now. Please keep in mind that limited liability businesses come in a variety of shapes and sizes. The following is for a private corporation with a limited-by-shares structure. Let’s look at what a private limited liability company is, as well as its advantages and disadvantages.
Definition of a Private Limited Liability Company
A private limited liability corporation is one in which the number of shareholders is limited to two to fifty and the capacity to transfer shares is restricted. The private company’s name must finish in “Limited,” such as AGRO Nigeria Limited. A private limited liability company can be founded even if a qualifying private company has the status of a private exempt company.
The following are the provisions of a private limited liability company’s Memorandum and Articles of Association:
1. Restricts the ability to sell its stock.
2. Has a maximum membership of 50 people; and
3. Does not offer any of its shares or debentures to the general public.
Advantages of Private Limited Company (Merits)
1. Limited Liability: Due to financial difficulties during the recent recession, many businesses were forced to close permanently. The financial obligation of shareholders of a private limited corporation is limited to their shares. As a result, stockholders’ personal assets would not be lost if a private limited company went bankrupt and had to cease down.
The money of the company are kept separate from personal assets in this situation. Because a corporation is controlled by its directors and owned by its shareholders, it acts as a separate legal entity. This indicates that the corporation owns its assets, income, and liabilities.
If the business goes bankrupt, the company director and shareholder are only liable for the amount of money they put into it.
2. Efficient Taxation: One of the main advantages of a limited corporation over a sole trader is tax efficiency. It’s probably the biggest reason why people go to the trouble of forming a limited liability company (or switching their structure from sole trader to limited company).
Limited corporations pay Corporation Tax on their profits (at a flat rate of 19%), whereas sole traders pay Income Tax on all taxable incomes (ranging from 20% to 45%). In general, this lower the tax rate for limited companies. A limited corporation can also claim a broader range of tax-deductible charges and allowances against profits.
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3. Existence Indefinitely: Another benefit of a private limited company is that it will continue to exist even if the owner dies or leaves the company. Private limited liability companies (LLCs) are formed. When a corporation incorporates, it becomes a separate legal entity with the ability to sue and possess assets from the company owner.
A sole proprietorship varies from a private limited company in that the latter is held by a single person who is personally liable for the firm’s debts and is fundamental to its continuous existence.
4. Offers Brand Protection: No two limited liability companies can have the same name. By forming a limited company, you are preventing anyone from using your company name (fraudulently or coincidentally).
You are not reserving your company name by registering as a sole trader. As a result, it’s typical for business owners who don’t want to run a limited company (such as sole traders) to set up a dormant (non-trading) corporation just to prevent someone else from using the company name.
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5. Prestige and Assurance: The openness of operating your small business as a limited company gives potential investors, partners, and customers peace of mind and assurance.
This is due to the fact that all limited companies must be registered with Companies House. A corporation is given an official Companies House number and its information (including names, addresses, and even financial information) is placed on the public record after it is founded.
Because sole traders are not registered with Companies House, they are less transparent to the public.
6. It’s Easy To Set up and Run: A limited company is one of the simplest and most straightforward business entities to establish.
With only the following information, the business formation process can be completed online in as little as three working hours:
a. The name of the company is unique.
b. Address of the registered office (official address for the company).
c. Information about the director (name, address, nationality, date of birth, occupation).
d. Information about the shareholder (name, address, birthplace, phone number, mother’s maiden name).
e. Person in possession of critical control information (name, address, nationality, date of birth, occupation, nature of control).
f. Capital in the form of shares.
g. Account holders, directors, and anyone with substantial control must provide identification and proof of address (this can be completed online in just minutes).
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Disadvantages of Private Limited Company (Demerits)
The private limited company is defined as a company with a minimum of two and a maximum of fifty members that is created by at least two individuals and has a minimum paid-up capital. Though there are numerous benefits to forming a private limited company, it is not without its drawbacks. As a result, it has some drawbacks, which are as follows:
1. Share Transfer Restrictions: A private limited company’s main disadvantage is that its shares are not easily transferable. According to the Company Act, members of a private limited company are unable to transfer their shares.
2. Difficulties in Expansion: Due to a small number of members, a lack of cash, and a restriction prohibiting the transfer or sale of shares, it is difficult to transfer or expand the business of a private limited company. However, because the maximum number of shareholders authorized is only 50, economic progress may be stifled.
3. Misrepresentation and Fraudulent Accounts: Because the financial statement of the firm or other statements are not required to be published to the registrar or the public, there may be opportunities to make or conduct fraudulent or misrepresentative accounting or other financial transactions.
Accountants may abuse their knowledge and try to inflate income in order to avoid paying taxes to the government.
4. Centralised Authority: A centralized system of authority is created when the power and responsibility for directing the company are concentrated in the hands of a few members of the board of directors. As a result, owners who are not involved in the company’s operation or management may have their rights revoked at times.
5. Autocracy: Because the management of a Private Limited Company has absolute power and autonomy, they frequently try to sway key decisions, particularly in the areas of recruitment and subject topics that are relevant to their own interests.
6. Small Capital: Because a private limited company is not a large-scale corporation, the quantity of cash required is typically small, which poses a big challenge for the individuals involved. Frequently, a company’s future potential is unable to be realized due to a lack of adequate funding.
7. Profit-sharing: Many private limited businesses, sometimes known as PLCs, are extremely profitable. In most circumstances, the profit of a Private Limited Company reaches 100%. Unfortunately, profits are diluted since profits are not divided equitably across stockholders.
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A private limited company’s benefits and drawbacks have been examined. Now you must determine whether a limited business or a sole proprietorship firm best meets your situation and demands. To be prepared, it is necessary to research the advantages and disadvantages of forming a business. And this article has discussed the benefits and downsides of a private limited liability company.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.