private limited companies

Limited companies can be public or private. Starting a private limited company is a good way to start and run your business. In this lesson, you will learn all that is involved in forming a private limited company, its operations, and rules. Unlike a public limited company which trades its shares on the stock exchange, a private limited company does not trade publicly, and its membership is limited in number.

LEARNING OBJECTIVES

By the end of this topic, you should be able to;

• Describe private limited company
• Explain the characteristics of a private limited company
• Discuss the formation and management of private limited companies
• Discuss the sources of capital for private limited companies
• Explain the advantages and disadvantages of private limited companies

A private limited company is a firm that is privately owned. It is a business entity formed by 2 to 200 persons. A private limited company is a separate legal entity from its owners. A private limited company is owned by the shareholders.

FORMATION OF A PRIVATE LIMITED COMPANY

The initial people intending to form a company are required to submit some documents to the Registrar of companies. These requirements are not the same all over the world, they may vary from state to state or country to country. Some of the most common requirements include:

• Memorandum of association.
• Articles of association.
• List of directors.
• Directors' declarations.
• Name of the company.
• Official address of the company.

On approval, the Registrar of companies issues the certificate of incorporation. The company starts operating at this stage.

An example of a private company is a retailer that lacks a national presence.

Most private companies are small. This is because of low capital.

A private company operates as a distinct legal entity from its shareholders and directors. This means that the assets, liabilities, and profits belong to the company. Shareholders are not wholly responsible to the company’s debts.

WHO CAN SET UP A COMPANY?

A private limited company is owned by shareholders. Each shareholder holds a certain percentage of shares. In case you set up a private company yourself, you would own 100% of the shares. In case you set up a private company with others, you would divide the available shares among yourselves depending on your rates of contribution.

You must buy one or more shares from the company in order to become a shareholder. The more shares you have, the larger the business percentage under your ownership.

SOURCES OF CAPITAL FOR PRIVATE LIMITED COMPANIES

• Share capital.
• Loans from financial institutions.
• Finances from government agencies.
• Retained profit.
• Trade credit.
• Hire purchase.
• Leasing and renting.

WHO RUNS PRIVATE LIMITED COMPANIES?

Private limited companies are managed by the board of directors and hired professional managers. Some private limited companies need hired professionals to manage the company.

A private company must have at least 1 director. Most owners of private companies are directors. This means that you can own, as well as manage a limited company. You can either do this yourself or with the help of others.

The characteristics of private limited companies include:

• Restricted transfer of shares.
• There is lack of secrets.
• Slow decision making.
• They do not sell shares to the members of public.

DISSOLUTION OF PRIVATE LIMITED COMPANIES

Private limited companies can be dissolved due to any of the following reasons:

• Court order.
• De-registration by the Registrar of companies.
• Bankruptcy or insolvency- the inability to meet its financial obligations.
• Resolution by members to voluntarily wind up.

ADVANTAGES AND DISADVANTAGES OF PRIVATE LIMITED COMPANIES

ADVANTAGES

• Losses are shared. In case the company incurs a loss, it is shared between shareholders.
• Owners have limited liabilities. Company owners are not obliged to pay outstanding debts beyond the share value they hold. This protects the assets of company owners.   
• Ability to hire professional services. This makes its operations more professional than those of an unincorporated sole trader.
• Can start operating with at least one director. A company owner can also be the director of the private limited company.

DISADVANTAGES

• Legal requirements. There are a lot of legal requirements that must be met before a private limited company is issued with a trading license.
• Decision making is slow. Unlike a sole proprietorship, a private limited company has a slower decision making process. This is contributed by it having more than one decision maker in most cases.
• There is lack of secrecy. Some legal requirements make it mandatory for companies to disclose some information to the public.
• They do not sell shares to members of the public. This limits the amount of funds in the business.
• They cannot raise capital through the stock exchange market. This is because they do not sell shares to members of the public.

SUMMARY

We’ve learnt that:

• Limited companies can be public or private.
• A private limited company is a separate legal entity from its owners.
• A private limited company is owned by shareholders.
• The more shares you have, the larger the business percentage under your ownership.
• Private limited companies are managed by the board of directors and hired professional managers.