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What Is a Private Limited Company? - Definition, Advantages & Disadvantages

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  • 0:01 What Is a Private…
  • 0:11 Advantages
  • 2:32 Disadvantages
  • 2:57 Lesson Summary
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Lesson Transcript
Instructor: Kimberly Winston
A private limited company is one type of business structure. In this lesson, you will learn what a private limited company is and explore some of its advantages and disadvantages.

What is a Private Limited Company?

A private limited company, or LTD, is a type of privately held small business entity. This type of business entity limits owner liability to their shares, limits the number of shareholders to 50, and restricts shareholders from publicly trading shares.

Advantages

Let's look at some of the advantages of having a private limited company.

Limited Liability

During the recent recession, which lasted from December 2007 - June 2009, many businesses experienced financial problems and permanently closed. One advantage of owning a private limited company is that the financial liability of shareholders is limited to their shares. Therefore, if a private limited company was in financial trouble and had to close, shareholders would not risk losing their personal assets. Although, perpetrating a fraud related to the private limited company would negate an owner's limited liability protection.

Restricted Trade of Shares

The restriction placed on the sale or transfer of shares may be considered an advantage or disadvantage, depending on your outlook. It is an advantage to some shareholders because shareholders who want to sell shares cannot sell them to outside buyers. Shareholders must also agree to the sale or transfer of shares; therefore, the risk of hostile takeovers is low. The restriction placed on the sale of shares is a disadvantage because shareholders have limited options for liquidating shares.

Continued Existence

Another advantage of a private limited company is its continued existence, even after the owner dies or leaves the business. Private limited companies are incorporated. When a business incorporates, it becomes an independent legal entity, meaning it is able to sue or own assets separate from the company owner. A private limited company differs from a sole proprietorship in that the latter is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence.

Tax Breaks

Private limited companies also enjoy tax advantages. For example, their corporate taxes may be lower than those paid by other types of businesses. Financial statements for private limited companies must be filed no later than nine months after the fiscal year ends. The first accounting period begins the same day that the business is incorporated. When pursuing tax advantages, private limited companies must keep accurate records.

Disadvantages

While owning a private limited company has several advantages, there are some disadvantages associated with it as well, such as the inability to publicly sell shares and limits on growth. Since the shares of a private limited company are not sold on stock exchanges, owners are only able to raise a limited amount of capital. Growth may be limited by restricting the number of shareholders to 50.

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