What Is a Private Limited Company? A Definitive Guide
By Indeed Editorial Team
Published November 30, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
In the business sector, there are many investment paths you can take depending on your interests and financial career goals. For those who want to invest in large-scale corporations, an important factor to look for is whether the investment is part of a private limited company. If you're interested in becoming a company executive, director or shareholder, it's important to know what private limited companies are and understand why they're so attractive to investors.
In this article, we explain what a private limited company is, how it differs from a limited liability company and the advantages and disadvantages of this type of company.
What is a private limited company?
A private limited company, or LTD, is a privately owned firm that doesn't trade on public exchanges. Private firms can still accrue shareholders and issue stock, but they don't have the same requirements as publicly traded companies. The fundamental difference between a private limited company and a public one is that LTDs don't involve registering with an initial public offering (IPO), which is a process where private companies offer their shares to the public to help raise capital. Private companies typically take one of four forms:
Limited liability corporations (LLCs)
Companies determine their company type based on the circumstances of their firm, with considerations for shareholders, taxes and investments. Every company in the U.S. begins as an LTD, with executives deciding whether they want to trade publicly.
Related: What Are Private Equity Firms?
What is limited liability?
Limited liability refers to the lack of risk for company investors and owners if a company fails. This company structure is attractive to investors as it ensures that their private assets aren't at risk should the company they've invested in struggle financially.
The liability of a shareholder depends on however much money they invested in the company, meaning that even if the company goes bankrupt, they're only responsible for the amount of money they put in. Individuals with substantial income can benefit from limited liability structures, as it gives them the opportunity to invest and make money while not losing any personal wealth should something go wrong.
Private limited company vs. LLC
Private limited companies and limited liability companies (LLCs) are similar business structures that operate for many of the same reasons. There are, however, some key distinctions between the two that shareholders may want to be aware of. Here are some of their similarities:
Both are private limited companies, as an LLC is a subtype of private limited company
Both an LLC and a standard private limited company provide members with personal liability protection, meaning that the personal assets of investors are not at risk should the company go into debt or enter a lawsuit
Both LLCs and LTDs are subject to state laws
Both business structures are separate legal entities under law, meaning that the company is its own entity independent of its owners
Both LLCs and private limited companies undergo the same registration process
Both companies are private and don't have to publish their private financial data
Here are some differences between the two:
Private limited companies have the financial designation of LTD while limited liability companies are LLCs
On their taxes, LLCs pay fees through their owners even though the company is a legal entity, while the IRS taxes LTDs as a separate legal entity and pays the taxes on their company profits
A private limited company is a corporation, while an LLC is a partnership because of its lack of shareholders
LLCs don't need to hold annual conferences or keep meeting minutes like corporations and LTDs
Advantages of a private limited company
Here are some of the major advantages of private limited companies:
A common reason that people choose to keep companies private is because of limited liability. With limited liability, shareholders don't need to worry about the safety of their personal assets if the corporation enters a lawsuit or goes into debt. Instead, investors only have to pay whatever amount they invested in the first place, so if you invested $1 million in the company initially, you would only have to contribute $1 million to its repair.
Another benefit of private limited companies is that they can keep their finances private. Other companies wishing to invest may still find estimates of a private limited company's financial data online to determine whether they want to buy shares. The privacy associated with these companies can be attractive to potential shareholders.
Ability to sell shares
Private limited companies can sell shares, which is a common method for raising capital. Companies can use the money earned from selling shares to invest in other ventures and also grow their business internally. The limited liability component of private limited companies can attract investors, who don't need to worry about risking their personal assets if the company fails.
Separate legal entity
A private limited company has the distinction of being a completely separate legal entity in the eyes of the law. This means that they file taxes on behalf of the company itself as opposed to its executive members. Because of this, the private limited company pays its own taxes on its own goods, divides up profits among shareholders and uses the leftover balance as capital for future investments of fees.
Disadvantages of a private limited company
Here are some disadvantages of private limited companies:
One disadvantage of private limited companies is that they have less transparency regarding their finances and negotiations. This can lead to potential investors being less trusting of private limited companies and can cause them to invest elsewhere instead. The advantage of this, however, is that members of private limited companies get to enjoy a level of privacy that public companies may not.
Challenging to borrow funds
Another disadvantage of private limited companies is the difficulty of borrowing money. Most decisions made by private limited companies have to be approved by all members. When borrowing funds, a director must pledge to pay the debt using their personal finances if the company cannot pay the debt on its own. A benefit of this is that members of private limited companies are more likely to stay vigilant of their debts.
Challenging to sell shares
It can be challenging for shareholders of private limited companies to sell their old shares because of the company not being publicly traded. Shareholders can only sell if other shareholders approve the transaction, which can significantly slow down the investment process and potential for financial gain. A potential benefit of this is that all members of a limited company can provide input on potential share sales, even if those shares don't belong to them.
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