Private Limited Company

Updated on April 12, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Private Limited Company (PLC)?

A private limited company is a type of business structure separate from its owners and shareholders. This means that the shareholders are not personally liable for the company’s debts and liabilities. So, it is a type of business structure that offers limited liability protection, ownership flexibility, and potential tax benefits.

What Is Private Limited Company (PLC)

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In a private limited company, the company shares are not publicly traded and are owned by a small group of individuals. The company is required to have at least one director and one shareholder. The maximum number of shareholders is limited to 200. The company’s articles of association set out the company’s internal management and the shareholders’ rights and duties. It’s a popular business structure in many countries, including India, the United Kingdom, and many other Commonwealth countries.

Key Takeaways

  • A private limited company is a corporation that its shareholders privately hold.
  • Private corporations can have shareholders and issue stock, but the stock of private companies does not trade on public markets and is not distributed through initial public offerings (IPOs).
  • Unlike a sole proprietorship or partnership, a private limited company requires more paperwork and may cost more to set up and operate.
  • One of the reasons why firms want to remain private is because of the hefty expenses associated with an initial public offering.

Private Limited Company Explained

A private limited company is a type of structure that offers limited liability protection to its shareholders, meaning that its assets are protected if the company cannot pay its debts. As a result, private limited companies are considered more credible and professional than sole proprietorships or partnerships. They also have more flexibility in raising capital, as they can issue shares to investors in exchange for funding.

However, setting up a private limited company involves more compliance and paperwork than a sole proprietorship or partnership, and it may be more expensive to set up and maintain. Additionally, private limited companies are subject to more stringent reporting and regulatory requirements than other business structures.

Overall, a private limited company is a good choice for those who want to protect their assets while enjoying the credibility and flexibility of a more formal business structure.

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Features

Some of the key features of a private limited company include the following:

  • Limited Liability: Shareholders are only liable for the company’s debts and liabilities up to their unpaid share capital.
  • Separation of Ownership and Management: Shareholders own the company but do not manage it. The company is run by its directors, who the shareholders appoint.
  • Number of Shareholders: A PLC can have a maximum of 200 shareholders.
  • Legal Status: A private limited company is a separate legal entity and can enter into contracts, sue, and be sued in its name.
  • Transferability of Shares: The shares of a PLC are not freely transferable, and the company’s articles of association may restrict the transfer of shares.
  • Annual Returns and Financial Statements: They must file annual returns and financial statements with the relevant authorities.
  • Auditing: Companies must get their accounts audited annually by a practicing chartered accountant.
  • Compliance: PLCs are subject to more stringent compliance requirements than other types of business structures, including annual meetings, filing of annual returns and financial statements, and holding of statutory records.
  • Dissolution: A private company can be dissolved voluntarily or by the court after following the proper procedure as per the law.

Types

#1 – Small Private Limited Company

This type of company is defined as one which meets certain criteria regarding turnover, net worth, and the number of employees. In addition, they have certain relaxed compliance requirements per the Companies Act 2013 in India.

#2 – One-Person Company (OPC)

This is a type of private limited company where there is only one shareholder and one director. These companies provide the benefits of a PLC with the simplicity of a sole proprietorship.

#3 – Listed Private Limited Company

This type of company has its shares listed on a stock exchange and is subject to more stringent compliance and regulatory requirements.

#4 – Producer Company

This type of company is formed to promote the interests of its producer members, such as farmers or artisans.

#5 – Non-Profit Private Limited Company

This type of company is formed to pursue a specific social or charitable purpose and is not permitted to distribute profits to its shareholders.

#6 – Holding and Subsidiary Companies

A holding company holds the majority of shares of another company, called the subsidiary company. The holding company can control the subsidiary company and can also have multiple subsidiary companies.

Examples

Let us have a look at the examples to understand the concept better.

Example #1

One example of a US-based private limited company is Patagonia, Inc., an American clothing company that markets and sells outdoor clothing. The company was founded in 1973 by Yvon Chouinard and is based in Ventura, California. Patagonia is privately owned as a PLC, and its shares are not publicly traded. The company is run by its management team and board of directors. Also, the shareholders are not personally liable for the company’s debts and liabilities.

Patagonia is known for its commitment to sustainability and environmental responsibility. The company uses eco-friendly materials and practices and donates 1% of its sales to environmental causes. As a PLC, Patagonia has the flexibility to make long-term business decisions that align with its values without the pressure to meet the short-term financial expectations of public shareholders.

Patagonia has grown to become a well-known and respected brand in the outdoor clothing industry, with over 60 retail stores in the United States and internationally. Its products are also sold through a network of dealers and distributors. The company’s success as a private limited company is a testament to the benefits of this business structure for companies that prioritize values and profits.

Example #2

Private limited companies are not publicly traded and have few shareholders. An example of a PLC can be a small retail store in a local community that a family owns and have the shares only held by the family members, where the ownership and management are separate. These types of companies are not required to disclose financial information publicly and are not beholden to the demands of public shareholders.

Advantages & Disadvantages

Advantages

  • Limited liability protection for shareholders.
  • Separation of ownership and management.
  • Credibility and professionalism.
  • Flexibility in raising capital.
  • Ability to issue shares to investors in exchange for funding.
  • Ability to continue existing even if shareholders change.
  • Has a separate legal entity and can enter into contracts, sue, and be sued in its name.
  • Compliance and reporting requirements can help to ensure transparency and good governance.

Disadvantages

  • More compliance and paperwork are required than in other types of business structures.
  • More expensive to set up and maintain.
  • Stricter reporting and regulatory requirements.
  • Shareholders have limited control over the company’s operations and decision-making.
  • Difficulty transferring shares due to restrictions in the company’s articles of association.
  • Shareholders are not entitled to a proportion of the company’s profits as dividends.
  • Shareholders are not entitled to a proportion of the company’s assets in case of liquidation.
  • More difficult to dissolve than other types of business structures.

Difference Between Private Limited Company And Public Limited Company

  • A minimum of two members are required to form a private limited company. Whereas, in the case of a public limited company, at least seven members must be there for its formation.
  • A public limited company refers to a company that is listed on a recognized stock exchange and its securities traded publicly in an open market. On the other hand, a PLC is not listed on a stock exchange, as its stock is held privately by the members.
  • A private limited company is a type of company in which the shares are not publicly traded and are owned by a small group of individuals. The shareholders have limited liability, meaning they are not personally liable for the company’s debts and liabilities. The maximum number of shareholders is limited, usually to 200. These companies are not required to disclose financial information publicly and are not beholden to the demands of public shareholders.
  • On the other hand, a public limited company is when the shares are publicly traded and can be owned by many shareholders. The shareholders have limited liability but are exposed to more financial risks as the company’s shares are publicly traded. These companies are required to disclose financial information publicly and are beholden to the demands of public shareholders.

Private Limited Company vs LLP

  • A private limited company is a full-form of PLC, whereas LLP is Limited Liability Partnership.
  • An LLP is the best choice if one intends to establish a small business with a partner and has a restricted amount of money. On the other hand, a firm should choose to operate as a private limited company if it intends to experience rapid expansion and raise a significant amount of capital.
  • A Private limited company is bigger than a limited liability partnership. Thus, compliance and regulations are more in PLC as compared to LLP.
  • Limited liability partnerships (LLPs) can’t get funding from venture capitalists (VCs) or angel investors. However, Pvt. Ltd. companies can make venture capitalists or angel investors shares in the firm.

Private Limited Company vs OPC

  • A private limited company is a full-form of PLC, whereas OPC is a one-person company.
  • Owners run the OPC; the company doesn’t need to hold board or annual general meetings. However, directors must have at least four board meetings each year if they are responsible for managing a Pvt. Ltd. firm.
  • PLCs are mostly professionally managed. In contrast, one-person companies are run with the help of family members.
  • In the case of funds, borrowing is easy for PLC, whereas OPC finds it difficult to take huge loans.
  • Legal compliance and scrutiny are higher in PLC as compared to OPC.

Frequently Asked Questions (FAQs)

Who controls a private limited company?

The stockholders of a Private Limited Company are the company’s owners, while the directors are the company’s managers. But, not all directors are shareholders in the firm, and it would be impractical for each shareholder to take on the CEO role.

Can private limited companies sell shares?

A private corporation is a commercial enterprise that is privately owned and operated. It may issue shares of stock, but these shares will not be made available to the general public, nor will they be traded on a public stock market. Shares of private business stock are those that the company has distributed to its workers or investors.

What is compulsory for a private limited company?

All privately held businesses must organize and participate in an annual general meeting. These businesses are obligated to hold their meetings no later than six months after the end of their fiscal year.

This article has been a guide to What Is Private Limited Company. We explain its examples, advantages, disadvantages, comparison with PLC, LLP, features, and types. You may also find some useful articles here –