7.3 - Private Limited Companies

A private limited company is a business that does not have it's shares traded on the stock exchange. It's  a limited liability company and these vary in size with large sales revenue, number of employees, and profit. Private limited companies can be very large and some can be small or medium-sized. 

Liability and Legal Issues of a Private Limited Company

A private limited company can raise finances easily because of it's limited liability status. Investors tend to be more confident in this type of business because their exposure to liability is limited. In the event of financial difficulties, only the company is held liable. 

There are shareholders in this type of company. Each shareholder owns a portion of the company which is equivalent to percentage of shares they purchase. With the limited liability status, the shareholders are not held responsible for any debts which the company may incur. Instead, shareholders will only loose the value of their investment which they have in the company. 

Several legal issues are to be carefully considered before deciding on a private limited company. The include:

• Election of the board of directors at an Annual General Meeting by the shareholders
• Setting up of the company. This is known as incorporation of the company
• Fining by the law for breaking any of it's legal obligations
• Registration of the company with the Companies House. This enables it to operate as a separate legal entity

When a company becomes incorporated, it will have a memorandum of association and the articles of association. This memorandum includes:

• Name of the company
• The registered office
• Status indicating the limited liability status of the shareholders
• Activities of the company
• Authorised capital of the company which is the type of share issued by the company and the amount of each type which it can issue

The articles of association include:

• How profits will be shared
• Number of dictators, their rights and duties to the company
• Frequency and procedure of Annual General Meetings
• Voting rights of Shareholders

Activity 21 - Why do you think a company would choose to be anything other than limited liability?