5 Limitations of Private Limited Organizations

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5 Limitations of Private Limited Organizations

The idea of owning a business appeals to many people today. It comes with many advantages, which makes it attractive to many. There are various ways you can structure your business as a startup. Examples are sole proprietorship, partnership, public limited company, and private limited organization. Each business form comes with its unique characteristics as well as pros and cons

Unlike a public limited liability company, only a small group of people owns a private company. As a result, such companies do not raise capital by making their shares public. In addition, this sort of company requires a minimum of two members and 50 members for the formation. 

It is one of the many business structures that exist for people that want to establish a startup. The ownership of such a company lies within the shareholders. The company is mandated to pay corporation tax from its profit, while the shareholders share the remaining profit. In addition, there are directors charged with the mandate of running the firm’s affairs on behalf of the shareholders. 

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Such an organization is termed limited in that the financial responsibility of such a company is a factor of the share of the company that remains unpaid. The implication of this is that if such a company has a single shareholder and they own 15,000 shares, valued at £1, such company will be liable for £15,000 provided it was not paid. 

Setting up a business as a private limited company comes with both pros and cons. Some of the advantages are:

  • Less complexity since the shareholders are limited in numbers
  • The minimum required for formation is two, unlike seven for a public company
  • The legal requirement for formation is not as complicated as that of a public limited company
  • The company enjoys continuity after the death of the owner
  • The owners enjoy series of tax-deductible allowance 
  • The company enjoys some tax efficiency.

Despite all these advantages of a limited private organization, there are many disadvantages of a private limited company, and this article will explore five of such.

Here are the limitations of a private company:

  1. Transfer of Shares is Difficult 

According to the law, shareholders in a private company cannot transfer their shares freely to outsiders. This is only possible with the consent of the other shareholders. As a result, this creates inefficiencies as it prevents shareholders from having a timely investment decision that might benefit them. 

However, the fact that a shareholder needs to inform other shareholders brings some limitations and bureaucratic tendencies. As a result, they are stuck with the company since disposing of their share at will is impossible. This means that the shareholders might not dispose of their share even if they believe the company might lose money. This is one of the limitations of private limited companies. 

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  1. Access to Credit

Any financial institution funding a private company does so at relatively high risk. This is not surprising as the success and continuity of such a firm influence the shareholders’ life and wealth. Should any majority shareholder die, it might affect the company negatively with negative consequences. 

As a result, there are some restrictions on the part of financial companies regarding loans to such firms, and the company directors are usually the guarantor of such companies. As a result, it is typically hard for private companies to access funds to help their expansions. This is not surprising as what the directors can guarantee is based on their wealth. With this, the value of the asset of such a company is minimal. This negatively affects their growth and expansion over the years. 

  1. Complication of Account

Compared to other business structures, a limited company’s account is pretty complicated. The directors have to record essential information every month. They need to perfectly cover tax returns, all business expenses and ensure that the business accounts are current. 

The complication of such an account makes it essential to get external help. This is because mistakes or negligence with such an account can trigger severe penalties from the authorities. As a result, there is the burden of hiring an accountant or outsourcing the service. This creates an extra expense for them. 

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  1. Increased Legal Compliance 

One advantage of a private limited company is that the firm is a separate legal entity, different from the owners. As a result, the firm can be sued without the shareholders bearing liability for the firm’s error. However, this advantage has a catch in that such firms have a high legal requirement to comply with, compared with partnership and sole proprietorship. 

For example, all privately funded companies need to submit their annual financial accounts to the relevant authority (company House) when the financial year ends. They also need to report every change that occurs in the firm to the designated authority.

Due to this excessive legal compliance, essential company documents like details of return and directors, primary business activities, etc., are available to the public through the Companies House. This puts the company in a wrong spot as the publicly available information puts the company at a significant disadvantage since their competition can access such data. However, it is straightforward for them to work around such data and improve their business. 

  1. High Possibility of Dissolution

There is a strong possibility for the liquidation and dissolution of a privately funded company. Factors responsible for this are low capital, the disadvantage of business expansion, director dissolutions, etc. 

Many private companies find themselves being absorbed by a publicly funded company due to these disadvantages. Therefore, it is not surprising as public companies do not have to deal with some of the limitations of a privately funded company. 

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Conclusion

Without a doubt, a privately funded company has a series of advantages, which makes it an excellent option to structure your business. However, it is essential to keep the disadvantages in mind when trying to choose a business structure.