Advantages and disadvantages of private limited companies

Written by walter johnson
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Generally speaking, there are three types of business structures: sole proprietor; public limited liability and private limited liability firms. Each type has its own advantages and disadvantages. A sole proprietorship is run by one person who finances the firm himself and keeps all the profits. A private limited company only differs from a public one by how the firm raises funds. A private company must sell shares privately while a public firm can sell shares on the public stock exchange.

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Shared Profits

The main disadvantage of a private limited company is that the profits of the business must be shared. Since a corporation, whether private or public, is governed by a board of directors that, in a sense, represent shareholders, the company, in fact, has many owners and two layers of managers. This means that the single founder of the business must share all the profits.


Limited liability is likely the main reason why someone would consider forming a private limited company. For example, if the company is sued or fails, the only assets that can be claimed are the assets the shareholders place in the firm. Personal money and assets cannot be touched. In a sole proprietorship format, where the organisation is owned by a single individual, the owner's personal assets can be seized through court action to pay business debts. This is one reason why someone would want to form a "private limited company" in that the investor's liability is limited to only what is invested in the firm.


Becoming a private limited company has an advantage over a personal (or sole) proprietorship in that it has greater resources or access to capital investment. A private limited company has access to finances through selling shares, which a sole proprietorship does not. Selling shares might dilute control, but it does open the firm up to more sources of money, which is the point of selling shares in the first place. It has an advantage over a public corporation in that the latter has no control over how shares are bought and sold. Private buying and selling give the firm more control over where it gets its money. To sell shares in the public format means the firm is listed on various stock exchanges, which opens the firm up to even more sources of capital, but provides less control over who buys and who sells. A private format means the board of directors can choose who can buy and who cannot. Therefore, although a private limited company has more sources of capital, the company is controlled by shareholders. A sole proprietorship is controlled by the founder and his agents. In both private and public limited firms, the firm can raise capital by selling shares. The method by which this is done is different, which differentiates the nature of private and public selling. The sole proprietorship has greater control but less access to investment capital.


Becoming a private corporation increases the skill pool in the business. A sole proprietorship is based on and run by one person. This format assumes that this individual has all the skills and knowledge necessary to make informed decisions about all major areas of the company. Opening up the firm to private sources of capital can also increase the resources that the founder can rely upon. The simple fact is that being a sole proprietor is a lot of work. One founder takes all the profits but also takes all the risk, financially and legally. When a firm goes private, it spreads the risk around to shareholders while lessening the owner's personal workload.

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