A private limited company is a business with private ownership. By private ownership, we mean the founders or shareholders or management.
In private ownership, stocks aren’t available to the public but just to private groups. That means, unlike a public company, a private company can’t issue its shares through IPO. Hence there is no involvement of outsiders and all decisions are taken by internal groups.
Here, I assume you’ve already decided to start your own business but aren’t sure whether private ownership would fit your business or not?
You can choose from many types of business structures, one being a privately owned business. In this blog, we’ve already discussed what private ownership means and now we’ll talk about the advantages of privately-held business:
Separate Legal Entity:
One of the main advantages of private ownership is that all private limited companies have a separate legal entity which means the existence of the company and its owner are two separate things. Hence the company can enter and exits contracts on its own. Hire people on their own and pay off their debt on their own.
Ease of Decision Making:
A privately-owned business enjoys flexibility in decision making as the management does not have to answer to shareholders or the board of directors.
Unlike a sole proprietorship, a private limited company is a separate legal entity and has its own existence different from its owner. Hence even if the owners change or pass away the company would go on regardless.
A private limited company is not required to prepare and publish financial information to the public. The private dealings of the business hence aren’t subject to public scrutiny.
Privately-held businesses can stay true to their founders and owners' vision without facing interference from the shareholder or the government.
A private company is a separate legal entity which, means the company and its owner aren’t considered as one and when businesses face unforeseen financial loss, a private limited company’s shareholders do not have the risk of losing their personal assets. Only the amount invested in starting the business would be gone and the personal properties would be safe.
A private limited company enjoys the facility of borrowing more funds than LLPs as it has more options for taking on debt. Not only are bank loans easy to obtain but the option of issuing debentures and convertible debentures are also available. Even other financial institutions welcome private limited companies better than other entities.
Private limited companies can be sold or transferred, either partially or in full, to another individual or entity without any disruption to the current business.
If a business wants to expand across the globe, then it is important to get investments and form collaborations with foreign establishments which can be only done in private limited companies in India as they allow for FDI up to 100% through the automatic route, which means there is no requirement of any government approval for foreign companies to make an investment in India. This is against Partnerships and LLPs which need acceptance from the government.
As private limited companies are regulated by the Companies Act 2013 and need to follow stringent procedures, disclose norms and comply with various legal requirements, they are more organised creating value for owners.
However, there are a few disadvantages too:
Restriction on Transfer of Shares:
In a private limited company, shares aren’t easily transferable as in a public limited company. This means that the transfer of shares takes a few days of time however, it is easier than any other entity type. Also, these shares cannot be listed on the stock exchange.
Increased Cost of Legal Compliance:
For the companies which are doing good business & growing, the audit and statutory disclosures are in a way useful to protect the interest of the shareholders of the company. However, in some cases where the company is in losses, the legal cost of compliance is high if you compare it with an LLP Form of business.
As we told above that there’s no involvement of a third party or govt. hence most of the power lies in hands of the top level. They aren’t answerable to anyone and can take any decision.
We hope that after reading our blog Is Private Company Ownership Right for You? you would be able to decide whether you can opt for private ownership or not. If you want to set up a company in India and need assistance with your incorporation, please feel free to contact us anytime at email@example.com. Thank you for reading, we’re always happy to be able to provide useful information on topics like this!