Advantages And Disadvantages Of A Private Company Limited By Shares

A private company limited by shares is a legal entity separate from its members and is owned by its members who hold shares in the company. It is managed by its directors through the company’s governing constitutional document, also known as the articles of association.

In a private company limited by shares, the shareholders have limited liability as long as no fraudulent trading or any other type of misfeasance has been committed.

"Limited by shares" refers to the fact that the liability of the shareholders to creditors of the company is limited to the capital originally invested. Therefore, a shareholder’s personal assets are legally protected in the event of the company’s failure. However, any money invested in the company may be lost.

In a private company limited by shares, at least one share must be issued. The distribution ratio of shares to shareholders affects the distribution of dividends and voting rights in shareholder meetings.

Advantages of a private company limited by shares

  • Limited liability – Shareholders’ personal assets are legally protected.
  • Shareholders cannot sell their share to outside buyers, which means the risk of hostile takeovers is low.
  • It is a distinct legal entity that is separate from the owners. This means that the company itself can sue and be sued in its name, and can be separately held responsible for any wrongdoing. Any legal action against the company is filed against the company and not against its directors.
  • The control of the company is in the hands of its board of directors or shareholders in their respective shareholding capacity.
  • A private company limited by shares has perpetuity, which means it can carry on and outlive the directors upon their death.

Disadvantages of a private company limited by shares

  • The registration process of a private company limited by shares takes longer and is more costly than that of a sole proprietorship.
  • The restriction placed on the sale of shares is a limitation to the options in which shareholders have to liquidate their shares to raise capital.
  • A private company cannot raise capital by inviting the public to buy its shares.
  • Company name is subject to certain restrictions.
  • Personal and corporate information is disclosed on public records.
  • Accounting requirements are more complex and time-consuming and you may have to appoint an accountant to help you with your tax affairs.
  • Strict procedures have to be followed when withdrawing money from the business.

Sydney Chako

Mathematics, Chemistry and Physics teacher at Sytech Learning Academy. From Junior Secondary School to Tertiary Level Engineering Mathematics and Engineering Science.

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