What Are the Disadvantages of a Private Limited Company?

The main reason why people invest is to earn a profit. Investors also want to increase their profits and reduce their risk of loss in the event of adverse economic conditions. This pushes these investors to join their funds into a single unit to do business. In order to reduce the risk of loss of personal property in the event of failure of the firm to pay its debts these investors incorporate these businesses into private companies. These companies have their shortcomings.

The law restricts shareholders of a privately held company from transferring shares freely to non-shareholders without consent of other shareholders. This leads to inefficiencies since the investment decisions should be timely so that a shareholder can sell his shareholding in the company without informing the other shareholders. This bureaucratic tendency ties shareholders to the company since they cannot dispose of their shareholding even when they believe the company may lose money. An increased risk of loss exists due to the delay in executing the transfer of shares.

Privately held companies cannot issue shares to the public. This means that they are not able to raise large amounts of capital through issuing shares. This is because the law restricts these companies to a limited number of members. Therefore, they have a limit to the amount of capital they can raise from the issue of shares.

The risk of loss is high for a financial institution funding a privately held company. This is because the existence of these companies is dependent on the life and wealth of its shareholders. The death or bankruptcy of a majority shareholder is a big blow to the existence of these companies. Therefore, financial institutions have restrictions when advancing loans to companies of this type, and the directors of these companies have to act as guarantors of these companies. This makes it hard for privately held companies to access loans to finance their operations and expansion as the amount that directors can guarantee is limited on their wealth. This also limits the value of assets they own.

Shareholders in a privately held company face a high risk of personal loss since they can easily lose all their investment. This is because it the individual shareholders mainly fund the assets of the company. This is because a privately held company comprises only a few members who contribute capital to the firm. Thus, the company’s value reflects the wealth of its shareholders. The death or bankruptcy of a major shareholder has a negative impact on the company’s performance and continuity since the company's value is dependent on the value of individual shareholders.

A Private Limited Company is

1-Expensive

2-More complex and restrictive

3-Restriction on the raising of capital via sale of shares 

4-Sometimes disputes will arise between Directors and     

   Shareholders as their ideas of what is best