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Disadvantages of Private Limited Company

Restricted Access to The Stock Exchanges

Private limited companies can not issue shares to the public at large because of two main reasons. The maximum number of the shareholder in a private limited company can be only up to 200, and a private limited company can not issue prospectus neither it can advertise calling public at large to subscribe to its shares. In case you wish to avail of the benefits of the public issue, then you should incorporate a public limited company.

Public Disclosure of Company Data at MCA

The details of the company are available for public inspection and view on the website of the ministry of corporate affairs. On payment of a nominal fee, any person can obtain copies of the records of a company from the MCA. Every year a company is required to file an annual return after its AGM, the forms submitted at the time of filing the annual return is also available for public view. The data of a private limited company thus can be used by competitors. Though in a way, we can say that this is not a disadvantage because stakeholders can very well verify the genuineness of a company.

Increased Cost of Legal Compliance

Every company is required to get its books audited at the end of the financial year, and file ROC Returns after holding the annual general meeting of the company. 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, where the number of transactions is meager & 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. Hence, where the scale of operations is going to be less, then we recommend registering an LLP.

Limited Personal Control

The concept of a company involves investment by several persons in the company and with the dilution of the stake the control on the company also weakens as other stakeholders will also have a proportional say in the decision making. Though most of the decisions of the company can be taken by a simple majority vote in the shareholders meeting, however for certain critical decisions, a special resolution is required. For passing a special resolution consent of 75% or more is needed.

Issue of shares/transfer – Only among existing shareholders

A private limited company is a closed group of people; hence the entry of outsiders is restricted. The new issue of shares needs to be offered first to the existing shareholders before selling to outside investors. Similarly, for the transfer of shares to any third party, the consent of the board of directors is required.

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About Setindiabiz

Setindiabiz is an organized team of experienced CA, CS, & Lawyers, duly supported by a pool of trained accountants & paralegal staff that provides quality & affordable compliance services to startups & small businesses in India. The views, statements and recommendations expressed in this article or post are only for the sole objective of providing information, and it does not constitute professional advice or recommendation of the company. Neither the author nor the company or its affiliates accepts any liability for any loss or damage arising from any information in this article or any actions taken in reliance thereon.

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