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What is a Private Limited Company?

Fintech Harbor Consulting | What is a Private Limited Company?
Reviewer: Bohdan Popovchenko
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Introduction to Private Limited Companies

A private limited company refers to a business structure owned privately, as opposed to a publicly listed company. This type of entity is recognized in various jurisdictions worldwide, although specific characteristics can vary by country.

Despite variations in terminology, any company with limited liability of shareholders that is not publicly traded qualifies as a private limited.

A key advantage of this business structure is that it offers limited liability, protecting the personal assets of the shareholders.

Private Limited Company United Kingdom, Hong Kong, Ireland LTD, Limited Private Company (limited by shares) 
United States LLC Limited Liability Company 
Germany, Austria, Switzerland GmbH Gesellschaft mit beschränkter Haftung (Company with Limited Liability)
The Netherlands (and Dutch speaking) B.V. Besloten vennootschap 
France (and French speaking) SRL Société à responsabilité limitée
Spain (and Spanish speaking) Sociedad de responsabilidad limitada
Singapore, Australia, South Africa (Pty) Ltd  proprietary limited company
Poland/ Czech Republic, Slovakia Sp. z o.o. spółka z ograniczoną odpowiedzialnością/ spoločnosť s ručením obmedzeným
Lithuania UAB Uždaroji akcinė bendrovė
Hungary Kft. korlátolt felelősségű társaság

Table — example of private limited company and their abbreviation in the most popular jurisdictions 

Definition and Characteristics of a Private Limited Company meaning

A private limited company is a type of business entity where ownership is private and not available to the public through stock exchanges. These companies are characterized by their legal distinction between the entity and its owners, providing limited liability to its shareholders. This means the personal assets of the shareholders are protected in the event of financial failure. Understanding the pros and cons of a private limited company is essential for comprehending its overall impact on business operations.

Thus, let us emphasize the features of a private limited company:

  • Private ownership

Shares in Ltd cannot be freely traded or sold to the public

  • Distinction between the corporation and its owners

Personal assets of the shareholders are protected and cannot be foreclosed on by creditors

Legal Identity and Limited Liability Explained

Legal Identity as a principle and essence was first used as far back as ancient Rome to separate the identity of a corporation from its owners. 

This distinct legal status means the company can own property, incur debts, sue or be sued in its own name. Essentially, it functions as a legal person independent of the shareholders who own it.

Limited Liability refers to the protection of shareholders’ personal assets from financial liabilities. In the event of financial trouble or legal actions against the business, the personal wealth of the shareholders remains insulated. So, private limited company liabilities remain to be its liabilities. 

This expresses, for example, a very significant difference from such a form of doing business as an individual entrepreneur. Since in this form, the person still works in his own name and is responsible for all his own funds, which makes this form much safer

The difference is that Legal Identity essentially refers to the principles on which a legal entity is based, while Limited Liability refers to a specific type of legal entity — Private Limited Company. 

Fintech Harbor Consulting | What is a Private Limited Company?

Formation and Registration of a Private Limited Company

Since “Private Limited Company” is only a legal qualifier and not a specific legal form of corporation, the incorporation processes are different in each country. To understand what is a private limited company in business, it is important to note that it involves a specific legal structure with its own requirements and regulations. The following are the basic steps to register such a legal entity type.

Steps to Establish a Private Limited Company

Here are the fundamental stages in setting up a private limited company:

Selecting a name for the new legal entity. The name should not be the same as any existing registered business, and usually should contain words or abbreviations like “ltd”, “GmbH”, “Limited” etc. 

Drafting the articles/memorandum of association. Typically, for this type of legal entity, a standardized statute adopted by the government of the country of incorporation is used. But it can be changed if desired. It typically includes information about the structure, the address of the registered office, and the nature of the business.

Registration with the responsible authority and tax office. This process involves submitting Articles of Association, along with details of the directors and shareholders, and paying any required fees.

Opening a business bank account. To manage its finances separately from personal finances of its directors or shareholders, the firm needs a dedicated bank account. The company can then accept payments from customers and conduct its business activities. 

Documentation

After registering a company, several key documents are issued that relate to its legal status and operational framework. These documents are essential for legal, administrative, and financial purposes and must be maintained to ensure compliance with local laws.

  • Certificate of incorporation
  • Articles of association
  • Share certificate
  • Extract from the commercial register 

Understanding Share Capital in Private Limited Companies

Share capital Paid-up capital Authorized capital
The amount of money a company raises from its shareholders by issuing shares in return for investment Paid-up capital is the amount of issued capital for which the company has received payment from shareholders. That is, paid-in capital may be less than share capital. This is the maximum amount of share capital that a company is authorized to issue as stated in its memorandum of association. It sets a limit on the number of shares that can be issued without amending the articles of association.

Types of shares

Usually, a corporation issues ordinary and preference shares. Ordinary shares entitle the investors to manage the company and receive dividends (in proportion to their ownership). Preference shares do not entitle the investors to manage the business, but give them priority to receive dividends.

Private limited company advantages and disadvantages

Limited Liability

The most significant advantage is the limited liability protection afforded to shareholders. This means that in the event of financial loss or legal action against the company, the shareholders’ personal assets are not at risk. Their liability is limited to the amount they have invested in the company.

Separate Entity

A private limited company is a legal entity separate from its owners. This allows the company to enter into contracts, acquire assets, incur debts and sue in its own name rather than on behalf of its shareholders.

Capital Raising and Professional image

A private limited company creates a good perception of your business and also allows you to collect investments without personal risks. 

Limited Capital Raising

Private limited companies cannot raise capital by selling shares to the public, potentially limiting their ability to grow and expand compared to public companies.

Restrictions on Share Transfer

Shares in a private limited company are often not freely transferable because they usually require the approval of other shareholders or are restricted by the articles of association.

Limited Visibility

A private status may limit its visibility and stature compared to publicly listed companies, which may affect its ability to attract investments.

Fintech Harbor Consulting | What is a Private Limited Company?

Operating a Private Limited Company

Management Structure and Governance

While structures can be anything, for a start-up business in the form of a limited company, the simplest possible structure will suffice for management: 

  • Board of Directors / Director 

The directors are appointed by the shareholders to oversee the overall management. They are responsible for making all major business decisions and implementing the policies. 

  • Shareholders 

Shareholders are the owners of the entity. They invest capital into the business and, in return, receive shares representing part ownership. They hold significant power over major decisions through their voting rights in shareholder meetings. These decisions include appointing directors, approving financial statements, and making changes to the constitutional documents.

Compliance and Reporting Obligations

Different jurisdictions actually have different reporting obligations. But here are the main responsibilities of Private limited companies: 

  • Annual Returns

This document typically contains information about the current directors and shareholders, its registered office, and confirmation that the business is still in operation.

  • Financial Statements (annual accounts) 

These include the balance sheet, income statement and cash flow statement. Financial statements are often filed annually with the tax authority and may be audited by an independent auditor, depending on the size and turnover.

Global Perspective on Private Limited Companies

Comparison of Private Limited Companies in Different Jurisdictions

Country Corporate tax Minimum Capital Formation Compliance Shareholders obligations
USA Pass-through taxation none   File Certificate of Formation Annual Franchise Tax, file an Annual Report Members contribute capital, limited liability
UK 25% £1  Incorporate with Companies House, memorandum and articles Annual Confirmation Statement, Annual Accounts Shares issued, limited liability
Hong Kong 8.25% on profits up to HK$2 million, 16.5% above that HK$1 Register with the Companies Registry, Business Registration Office Annual Return, Profits Tax Return At least one shareholder, limited liability
Estonia 0% and 20% on distributed profits 1 EUR Register with the Estonian Commercial Register Annual report, ongoing registry updates Shareholders contribute capital, limited liability
Germany 15% (plus solidarity surcharge and trade tax) €25,000 Register with local Commercial Register (Handelsregister) Annual financial statements,  audited in certain cases Shares held as stakes, limited liability
Hungary 9% HUF 3,000,000 (about €8,000) Register with the Commercial register Annual financial statements, corporate tax return Minimum one shareholder, limited liability
Singapore 17% S$1 Register with Accounting and Corporate Regulatory Authority Annual Return, Corporate Tax Filing Minimum one shareholder, limited liability

FAQs

  1. Private limited companies do not offer shares to the public. Public limited companies can be traded on public stock exchanges.
  2. Private limited liability companies generally have lower minimum capital requirements than public limited liability companies, which require higher minimum capital due to their ability to raise funds publicly.
  3. Private limited liability companies often have simpler administrative processes and a less formal governance structure. Public limited liability companies must adhere to strict governance practices, including annual general meetings and a formal board of directors.

A private limited company must adhere to the rules regarding payment of the following taxes depending on the jurisdiction of incorporation:

  • Corporate Income Tax
  • Value-added tax / Goods and services tax / Sales Tax
  • Withholding tax
  • Payroll taxation and social security 

Yes, a private limited company can become a public one through an initial public offering (IPO).

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