A Private Limited Company is a company that is registered under the Companies Act, 2013. The word ‘private’ as simple as it sounds, means that the shares of a private company cannot be sold to the general public and also, cannot be traded on any public platform. The word ‘limited’ conveys that the shareholders enjoy limited liability which means that their liability will be as per their unpaid share capital. This article aims to discuss some of the disadvantages that Private Limited Company holds.
Private limited companies are popular choices of a lot of entrepreneurs today but it has its disadvantages like any other company. A Private limited company cannot issue shares to the public at large, nor can it freely trade its shares on public platforms like stock exchange markets. The maximum number of shareholders in a private limited company can only be extended up to 200. In case you wish to avail of the benefits of publicly issuing the shares of your company, then you should incorporate your business as a public limited company.
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Disadvantages of Private Limited Company
Although most startups choose to incorporate as a Private Limited Company, it still has a handful of disadvantages that entrepreneurs cannot afford to avoid. We have listed below all the disadvantages of a private limited company so that you can make an informed decision while opting for it as a legal structure for your business.
Public Disclosure of Company Data on MCA
The details of the company are available for public access and can be viewed 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 are 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 Annual Returns to the Registrar of Companies. For 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 are meagre, or in cases where the company is facing losses, such a huge number of compliances can increase the overall cost of operating the business. Compared with an LLP form of business, the number of compliances and their costs are way higher in a Private Limited Company. Hence, if the scale of your business operations is small, then we recommend you to get it registered as an LLP, instead of a Private Limited Company.
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Limited Control of owners
A company involves investment by several investors or shareholders and with the distribution of control among such a wide range of owners, the management of the company weakens as all these shareholders will also have a proportional say in the decision making of the company. Though most of the decisions of the company can be taken by a simple majority vote in the shareholders general meeting, for certain critical decisions passing a special resolution is required, for which at least 75% votes of the shareholders present and voting will be needed.
Issue of share transfer – Only among existing shareholders
A private limited company is a closed group of owners, where the shares are mostly held by related or well acquainted people. The entry of outsiders as shareholders is, although permitted, . The new issue of shares needs to be offered first to the existing shareholders before selling to outside investors. Also, for the transfer of shares to any third party investor, the consent of the board of directors, in the form of a resolution passed by majority of votes will be required.
Like any other form of business, a Private Limited Company also has its advantages and disadvantages. We hope that this blog has been helpful for you to understand the disadvantages of a Private Limited Company, and hope that you can now make an informed decision over the choice of the type of legal structure you wish to establish your business with.
How can Setindiabiz help?
Here, at Setindiabiz, we provide assistance in the registration of all types of businesses, including the registration of a Private Limited Company. To avail our services of Company registration, request a callback from our startup advisors.