Private Limited Company Advantages and Disadvantages

There are different types of entities that a businessman can establish. All of these types of entities have different structures and different purposes. One such popular option in India is that of a Private Limited Company. If you are incorporating your business as a Private Limited Company, you will get many advantages. We have talked in detail about the Private Limited Company, its advantages and disadvantages. Let us go ahead and find out about Private Limited Company.

What Is a Private Limited Company?

The first basic question you may have is, what exactly is a Private Limited Company? A Private Limited Company is an organization where the ownership is held privately by a group of people. These members have a certain share in the company, and their liability is also limited to their share. It should be noted that the shares of the Private Limited Company are not publically tradeable. One of the reasons why the Private Limited Company is so popular is because of the limited liability.

Private Limited Company

To register a Private Limited Company, you need at least two directors and two members. The maximum number of members in a Private Limited Company can be up to 200. Today, millions of small and medium businesses are established as Private Limited Companies. You will also find many Private Limited Companies that are owned and managed by families.

As per section 2(68) of the 2013 Companies Act, a Private Limited Company can be defined as –

  • A company with the minimum paid-up share capital.
  • Member count not exceeding 200.
  • Minimum presence of 2 directors and two members.
  • No provision to transfer the share through AOA (Article of Association).
  • No provision for public trading or initial public offering.

The requirements to set up a Private Limited Company are listed below

  • Presence of a minimum of two members.
  • Presence of a minimum of two directors.
  • Members should not be artificial legal entities.
  • At least one director should be an Indian citizen.
  • Presence of Digital Signature Certificate of the directors.
  • The minimum authorized share capital should be Rs 1 Lakh.

Advantages of Private Limited Company

You have now been through the basics of the Private Limited Company. We are sure that you understand what a Private Limited Company is and the fundamentals around it. Previously, we mentioned that there are many advantages of a Private Limited Company. Let us now look at these advantages one by one.

  • Going Concern –Going concern is an important accounting concept, and it applies to Private Limited Companies. Going concern means that there is no expiry date for the entity. The company will continue to exist until it has been officially dissolved. The death of the founders, directors or members will not impact the existence of the Private Limited Company in any way. The business should and will continue, irrespective of changes in members.
  • Foreign Investment – In the case of a Private Limited Company, only one director should be India. This means that the other directors in a Private Limited Company can also be from a foreign nation. Hence foreign directors can invest in a Private Limited Company, and as per the present rules, there can be up to 100% foreign direct investment in a Private Limited Company. This also helps the country by getting forex in.
  • Higher Credibility – Private Limited Companies are considered stable, and their financial statements are available on the MCA website. This promotes transparency and enables the stakeholders to trust the Private Limited Company. Since the details are available on the public portal, it is easy to authenticate the company information before doing business with it.
  • Limited Liability Ownership – We have mentioned this earlier as well. Members of a Private Limited Company have limited liability. In case of a loss, the personal assets of the members of a Private Limited Company can’t be used to settle the losses or the company’s debt. The liability of the members is only till the extent of their shareholding in the company. In simple words, the maximum that the members can lose in case of bankruptcy is their unpaid share value.
  • No Paid-up Capital – Amendments were made in the Company Act 2013, and after the amendment, the Private Limited Company didn’t need to have a minimum paid-up capital. This came up as a huge boost for the businesses, and today, it is even possible to register a Private Limited Company with an authorized share capital of just Rs 1 Lakh. Because of this, many small businesses can register as Private Limited Companies today.
  • Raising funds – It can be challenging to raise funds in a proprietorship or a partnership firm. It is not only document-intensive but many other factors are also considered. In the case of a Private Limited Company, it is easy to secure funds since venture capitalists and angel investors invest only in a Private Limited Company. They do not invest in a partnership firm or a proprietorship. Since it is easy to raise funds, it also becomes easy to scale the business.
  • Separate Legal Entity – In a Private Limited Company, the members are considered separate entities, and the company is a separate legal identity. This means the constitution identifies a Private Limited Company as a separate legal entity with its liabilities and assets. This creates a clear demarcation between the management and the ownership. In such a case, the managers can’t be held responsible for the loss in a Private Limited Company. Since the Private Limited Company is a separate legal entity, the cases can be registered by and against the organization.

Disadvantages of Private Limited Company

There are also some disadvantages of a Private Limited Company. Check them out below.

  • No Transfer of Shares – In a Private Limited Company, the company’s shares can’t be transferred under AOA. This means that the shares can’t be listed on the stock exchange. This creates issues during the transfer of ownership.
  • Restricted members – The members in a Private Limited Company can’t exceed 200. On the contrary, a public company can have unlimited members.
  • Restriction on Going Public – Private Limited Company can’t invite the public to invest in the shares. This means that the Private Limited Company can’t raise capital through an IPO.

Final Verdict

These were some of the advantages & disadvantages of the Private Limited Company, and we hope this has helped you understand more about the Private Limited Company. You can also find out the other types of ownership models, which will help you choose the best possible ownership framework for your organization.

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