A private limited liability company is defined as one which by its articles restricts the right to transfer its shares, limits the number of its shareholders from two to fifty, prohibits any invitation to the public to subscribe for its shares, and the name of the private liability company must end with the abbreviation of “Limited”, e.g. Bluebird Nigeria Limited, Godwill Nigeria Limited and Newswatch Nigeria Limited.
FEATURES OR CHARACTERISTICS OF PRIVATE LIMITED LIABILITY COMPANIES
- Ownership: The business is owned by shareholders who may be between two and fifty persons in number.
- Objective: The major aim of private limited company is to make profit.
- Source of capital: The capital required to set up and run the business is provided by the shareholders in form of shares. However, shares are not sold to the general public. They are sold privately.
- Liability: The shareholders have limited liability. In the event of liquidation, the amount a shareholder can lose is limited to the fully paid up value of his share or the capital he has invested in the business. His personal assets or properties are protected by the law.
- Legal entity: The business is a separate legal entity and is different from the owners of the business. The business can sue or be sued in its own name, without involving the owners.
- Continuity: There is continuity of business operations as the withdrawal or death of a shareholder may not affect the existence of the company.
- Shares are not easily transferable: Shares cannot be resold to other persons except with the consent of other shareholders.
- Management: The private limited company is managed by a board of directors appointed by shareholders.
SOURCES OF FINANCE OR CAPITAL AVAILABLE TO PRIVATE LIMITED COMPANY
- Loans and overdraft from banks: Loans and overdrafts can be obtained from commercial or development banks.
- Shares raised by shareholders: Shares are usually raised by shareholders (owners), which form the capital base of the company.
- Equipment leasing: Equipment can be leased out by companies for money.
- Retained (plough back) profits: The profits made by the company can be set aside or re-invested.
- Trade credit: Raw materials can be purchased by the company on credit.
- Hire purchase: Facilities can be granted to the company to buy and pay in instalments.
ADVANTAGES OF PRIVATE LIMITED LIABILITY COMPANY
- Large capital: Private limited liability company can easily raise capital asa result of many shareholders that form the business.
- It has legal entity: Private limited liability company has legal existence, hence it can sue and be sued in its own name.
- Shareholders have limited liability: In the event of business failure, the shareholder only loses his shares which he has contributed and his personal properties or assets are protected.
- Continuity of existence: The chances of continuity of existence is high as the death or withdrawal of a shareholder cannot affect the existence of the company.
- Efficient management: The business is efficiently managed by a board of directors appointed by the shareholders.
- Large profits: Private limited liability companies do enjoy large profits because of their large size.
- Possibility of expansion: The business can easily expand because of the large capital available to set up and run the company.
- It enjoys internal economies of large scale production: As long as the enterprise is large, production can be carried out on a large scale, leading to economies of production/scale.
DISADVANTAGES OF PRIVATE LIMITED LIABILITY COMPANY
- Limited capital: As a result of few number of shareholders coupled with the fact that shares cannot be sold to the public, the capital available for use is limited.
- Shares are not sold to public: The private limited company cannot sell its shares directly to the public. This acts as a limitation to the capital base and to expansion.
- Shares not easily transferable: A shareholder cannot sell his shares without the consent of other shareholders.
- Lack of privacy: There is lack of privacy as companies are required to publicise their accounts.
- Payment of corporate tax: Private limited companies are usually required to pay corporate tax, unlike personal income tax paid by sole proprietorship and partnership.
- Lack of personal contact: There is less personal contact with both the employees and customers, unlike in the sole proprietorship and partnership.
- Delay in decision taking: Before any decision is taken on any crucial matters, the board of directors or the shareholders must meet and this tends to waste a lot of time.