What is a private limited company?

Before we look into the steps to setting up a private limited company, let’s get a general idea about what is a private limited company. In fact, the simplest answer to the question “what is a private company?” is that it is a company structure that limits its liability protecting the personal assets of the shareholders and the directors. Private limited companies have a certain set of restrictions which are defined to be the bylaws of the company. These restrictions are known to be the company regulations too. The purpose of these regulations or the bylaws is to prevent any potential hostile takeover effort.

Major restrictions implemented on the ownership of the private limited company

  • No shareholder is permitted either to sell or transfer the shares unless he/she offered them first to another shareholder
  • No shareholder is authorized to sell the shares to the general public under any circumstance
  • The number of shares a single shareholder can hold is predetermined (restricted to a certain number)

So far, private limited companies are the most popular company structure in the modern business world. This particular company structure is particularly designed for those who intend to operate a profit generating business. Setting up a limited company can be done in order to provide the necessary financial protection to both the shareholders and the directors of the company.

Every private limited company has following characteristics in general.

  • Once registered as a limited company, the business will be considered as a separate legal entity. It will be earning its own income, own assets, responsible for debts and liabilities. In simplest terms, the business will be considered to be another person before the law.
  • Private limited company is the most common company structure for both small and medium scale businesses
  • These businesses are owned by shareholders. Shareholders are the individuals that buy shares of the company; it is an investment as far as the company’s concerned. Depending on the number and the value of the shares owned by individual shareholders, the percentage of their ownership will be determined.
  • The business’s liability will be restricted and it will not affect on the personal assets of shareholders or the directors. The liabilities will not go beyond the number and value of the shares they hold. In other words, when the respective business is not in a position to pay its bills, the shareholders may have to contribute only the nominal value of the shares they own.
  • When it comes to the company profit, it will be divided among the shareholders determining the percentage of their ownership. These profit amounts are known to be dividend payments (which is generally made annually). Most of the shareholders reinvest these profits in the business – particularly during the early years.
  • The daily operations of the business will be looked after by the appointed directors on behalf of the shareholders. Most of the occasions, shareholders appoint themselves as directors of the respective business.