Private limited company: definition

If you register a private limited corporation, you can avoid lots of pitfalls for your company, especially regarding financial trouble. This is why most people choose this legal structure.

Let's see what is a private limited company and why you should consider getting help to register your corporation as one!

What is a private limited company?

A private limited company, often abbreviated as Pvt. Ltd. is a legal business entity established as per certain laws. It combines the benefits of limited liability with flexibility and scalability.

The idea is simple: even if you're very confident about a business idea, you must limit your personal liability in case your company ever gets into financial trouble. This makes a private limited corporation, the perfect legal structure for most businesses.

How does a private company operate?

A private company LLC, by definition, works differently from a public business.

The specifics depend on the exact type of corporation. By definition, there are four main types of private companies:

• Sole Proprietorships
• Limited Liability Corporations (LLCs)
• S Corporations (S-corps)
• C Corporations (C-corps)

All of these companies operate under different rules and legislations:

Ownership and shareholders

The owners of private limited companies are the shareholders. These shareholders hold a certain number of shares in the business, which represent their ownership stakes. The more they hold, the bigger stake they have in the company.

Private companies have a limited number of shareholders. As the definition clarifies, shares for private corporations and LLC companies are not traded on public stock exchanges. Instead, they are bought and sold through private agreements among shareholders.

Limited liability and financials

Shareholders' personal assets are safe from debts and legal obligations. If the company faces financial trouble or lawsuits, shareholders don't have to cover these costs. The best part is that private companies have fewer regulatory and reporting requirements.

Management and decision-making

Founders or owners manage their private companies. They can also select a group of individuals, like a director board, to hold ownership stakes. It allows for more centralized decision-making and flexibility in running the business.

Profit distribution and goals

Private companies decide how to distribute profits among shareholders. The director board may reinvest profits for growth or distribute them among shareholders as dividends.

Advantages of starting a private limited company

A private limited company is a popular choice for business owners for several reasons:

Limited liability

Shareholders in a private company enjoy limited liability. This means that in case the business goes into debt or has problems, your personal assets (like your house) are safe. You don't have to pay off the company's debts.

Separate legal entity

A private limited corporation is like a distinct entity by law. It owns things and makes agreements by itself. Plus, you get a level of legal protection and flexibility where you need it the most.

Ownership transfer

The company's shareholders own a part of the company. People can buy and sell these shares. This flexibility helps with succession planning.

Capital generation

Private limited companies can raise capital by offering shares to investors. Shareholders invest money in exchange for shares. The company can then use this capital for its operations, expansion, and growth.

Tax benefits

Private limited companies can also benefit from tax advantages and deductions.

Privacy

Private limited companies enjoy an incredible level of privacy. They don't have to disclose much financial and operational information to the public.

Disadvantages of starting a private limited company

Of course, there are certain downsides too.

Limited members

Private companies have a limited number of members. It can be challenging to attract new investors when you need more money.

Disagreements with shareholders

Managing ownership can be tricky. Shareholders may have different ideas about running the business. In the end, it leads to disagreements.

Less attention

Private limited companies don't get much attention compared to public businesses. This makes it harder to find customers, members, and investors.

More paperwork & rules

As a private limited company, following the proper rules and regulations can be a bit overwhelming. You'll also have to deal with a ton of paperwork.