• Money
    • Budget
    • Shop
    • Travel
    • Stories
  • Career
    • Advice
    • Entrepreneurship
    • Freelance
    • Small Business
  • Investing
    • General
    • IRA + 401K
    • Stocks + Bonds
    • Retirement Planning
    • Estate
  • The Basics
    • Student Loans
    • Credit Cards
    • Debt
    • Taxes
    • More
  1. Home
  2. Investing
  3. General
  4. Advantages and Disadvantages of Private Limited Companies

Advantages and Disadvantages of Private Limited Companies

By: Robert Shaftoe
  • Share
  • Share on Facebook

Most of the advantages and disadvantages of structuring your company as a privately held, limited liability company can be attributed to the company's status as a closely held company. Limited liability companies are structured similar to limited partnerships. Its shareholders are referred to as members. Like partnerships, LLCs are treated as pass-through entities by the Internal Revenue Service and no income taxes are paid at the corporate level. Any other advantages or disadvantages of a particular LLC are dictated by how the is drawn up. Also, depending on the dynamics of the LLC's ownership structure, what some members may view as advantageous, others may view as disadvantageous.

Advantages

Privately held companies are not required to disclose financial statements to the public. These expenses increased with the passage of the , which mandated rigorous risk management and requirements, particularly for public companies. According to one Securities and Exchange Commission study, the average cost for directly attributable to Sarbanes-Oxley requirements was $2.3 million.

Other disclosure costs affecting public companies that private companies avoid include stock price associated with financial disclosures. When publicly traded companies report quarterly and annual financial results, any shortcomings can result in the stock dropping substantially. Also, private companies are subject to less pressure from outside entities regarding the company's management. This reflects another advantage: it is easier for private companies to retain corporate control, because no one can purchase their shares on the open market, which is necessary to gain seats on the .

Video of the Day

Disadvantages

Illiquidity risk is one of the most significant risks associated with ownership of private LLC interests. Illiquidity refers to the ease with which a shareholder can dispose of his shares. Investors value liquidity because it provides critical financial flexibility and the ability to minimize losses. All else equal, illiquidity risk reduces the value of closely held stock by an average of approximately 20 percent to 25 percent.

Private companies are generally smaller and have less access to capital markets. This increases the company's costs of raising capital, which is exhibited in higher interest rates on bank loans, and higher transaction costs in the event the company participates in a private stock offering.

Conclusion

It is difficult to generalize regarding the perceived benefits of structuring a company as an LLC, because management's interests are not always perfectly aligned with those of other shareholders. This is particularly true of very small companies. This is referred to as agency risk. Look at each company's ownership structure, the Membership Agreement, and overall financial performance in order to identify genuine advantages or disadvantages on a case-by-case basis.

Show Comments

Related Articles

What Is a Private Placement Memorandum?

What Is a Private Placement Memorandum?

Investing
Stocks + Bonds
By: Jack Busch
What is the Definition of a 3 for 1 Stock Split?

What is the Definition of a 3 for 1 Stock Split?

The Basics
Insurance
By: Neil Kokemuller

PARTNER CONTENT

7 Habits of Highly (Financially) Effective People

7 Habits of Highly (Financially) Effective People

Private Placement vs. Private Equity

Private Placement vs. Private Equity

Investing
General
By: Marquis Codjia
AMEX Listing Requirements

AMEX Listing Requirements

Investing
Stocks + Bonds
By: Gilberto Fuentes
What Is an Aggregate Market Value?

What Is an Aggregate Market Value?

Investing
Stocks + Bonds
By: Leigh Richards

Get Weekly Savings& Finance Tips.

  • Money
  • Career
  • Investing
  • The Basics
  • About
  • Contact Us
  • Terms
  • Privacy Policy
  • Copyright Policy
© 2019 Leaf Group Ltd. Leaf Group Media

Get Weekly Savings
& Finance Tips.

Money Made Easier.

Please enter a valid email.