Are you planning to start a business and take the first steps as an entrepreneur? First, make sure you understand the advantages and disadvantages of private companies. If you are going to sell goods or services in the U.S., you can set up a limited liability company (LLC) or a limited corporation. Both business structures are legally separate from their owners and offer protection from personal liability, but they also have their drawbacks.
Types of Private Limited Companies
A private limited company is a business entity that operates separately from its owners or shareholders. While it may issue stock, it's held under private ownership. In the United States, private limited companies may include LLCs, limited liability partnerships (LLPs) or corporations.
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For example, partners in an LLP cannot be held liable for the losses incurred by the company, explains the U.S. Small Business Administration. General partnerships, by comparison, come with unlimited personal liability.
This business structure exists in most countries, including the UK (Ltd.), Germany (GmbH), India (Pvt. Ltd.) and Mexico (SRL). An LLC, the most common type of private liability company in the U.S., can have one or more members who share ownership. These may include corporations, individuals or other LLCs. Members cannot be held liable for the company's debts, meaning that their personal assets are not at risk. In the case of a limited corporation, shareholders' liability is limited to the amount invested in the company.
Why Choose This Business Structure?
The main advantage of starting a private limited company is that your assets are protected in case of a lawsuit or bankruptcy. This means that if your business gets into debt or goes bust, you can only lose the money you invested. However, you can still be held liable for the company's debts or losses if you personally injure an employee or client or fail to withhold taxes from your employees' wages. The same goes for LLC owners who engage in fraudulent activities.
Private companies also have more freedom and flexibility than publicly listed businesses. First of all, they are fully owned by their members or founders, which may allow them to respond more quickly to challenges and opportunities. If, say, you want to launch a new product or service, you can simply consult your team and decide on the best course of action.
Second, privately held companies are not required to file quarterly reports and other documents with the U.S. Securities and Exchange Commission (SEC). Publicly listed businesses must file with the SEC and disclose their financial information to the public. Plus, they must obtain shareholders' approval before making investments, launching new products or changing their business strategy.
Disadvantages of Privately-Owned Companies
Going public is a good way to raise the capital needed to expand your operations. But this process can change a company's ownership, power dynamics and legal status, explains Forbes. For example, you'll need to comply with the SEC's requirements and meet certain market standards. Private companies are not subject to these rules, but there are some drawbacks you should consider.
For starters, you may find it difficult to secure financing and attract investors. Privately held companies have limited access to capital markets, which can affect their ability to expand. Additionally, they may incur higher transaction costs when selling shares through private stock offerings. Many times, private companies also have limited access to credit and may end up paying high interest rates on business loans.
Depending on the state, LLCs may cease to exist when a member dies or leaves the business. For this reason, it's important to check the legal requirements in your state before starting a business. That's not the case with corporations, though.
Consider the advantages and disadvantages of private companies before starting a business. Decide on a legal structure, set clear goals and plan things out. Think about your capital requirements and where you see yourself five or 10 years from now on. Also, note that you can start out as a private limited company and go public or change your business structure later on.