If you want to know the advantages and disadvantages of private limited company, this is the right article to read.
It explains a lot about Private Limited Company and the various pros and cons, to help you make the right decision.
The human mind is an incredible part of our anatomy and physiology.
The average brain manages an individual’s memory, emotions, vision, the temperature of the body, senses, etc.
The human mind is the hub or center of the human body’s activity.
In addition, the brain is thought central.
For example, when you woke up this morning, the brain was already fully engaged as you thought through what you are going to wear, eat for breakfast, looking at your activities of the day, helping you with your commute to work, conversing with other individuals in the home, looking at your emails and responding, etc. and etc.
In the course of that first hour upon your awakening, your brain was fully engaged.
Did you know that in one hour it is estimated that the brain or the mind processes between 60,000 and 80,000 thoughts?
As remarkable as the brain is, it is doubtful that you woke up this morning thinking about your brain surgery schedule if you are not qualified for brain surgery.
Even for the brain, there are limitations especially if you’re planning on starting or involving yourself in a career in which you have no training.
The same can be said if an individual wakes up one morning and wishes to start a company.
They just don’t simply buy an “open for business” sign and place it in the window of their home or other property and expect customers to come in and frequent their establishment. There is a process to starting a small scale business or even a big business in America.
Therefore, an individual must engage in the basic small business structure set up to protect themselves, their dream, others, and what is about to be one of the more important investments or activities in their lives.
Consequently, we will be discussing a private limited company and the associated advantages and disadvantages with the utilization of this business structure.
What is a Private Limited Company?
Private Limited Company can be referred to any business entity that has a “private” sort of ownership. As you can see it’s completely opposite to a “Public Listed Company”.
The importance of small business and its impact on the economy in America cannot be underestimated.
Recent statistics reflect that small business accounts for close to 44% of the gross domestic product.
Additionally, small businesses are a major contributor to employing individuals in America by providing over two-thirds of the employment jobs in the United States.
It could be argued that not only is small business the backbone of America but is also the heart and muscle of America’s economy.
Therefore, this heart needs to be protected by maximizing the protection afforded under the legal system. One of these protections is the way that small businesses can be legally structured.
One such way that is afforded to small businesses is the LLC. This legal structure, in other parts of the world, is known as a private limited company.
This basic legal umbrella can be comprised of a sole proprietor or partnership. The major characteristic differentiation between an LLC and other legal structures is the LLC is not a corporation.
However, it is structured to protect the assets of the owner by limiting the liability that the company and consequently the owner could face.
An LLC is provided with more flexibility than what a corporation experiences and its structure and protections are often most conducive to a company that has one owner.
6 Advantages of Private Limited Company
Advantage #1: Limited Liability
The primary advantage of forming a business under the LLC structure is the limitations placed against the individual as it relates to liabilities.
Specifically, if for whatever reason, the business does not do well and reflects this business financial situation in red numbers, the individual’s assets are protected.
Consequently, if a creditor comes after the LLC business for indebtedness then the company is solely responsible, but the individual’s personal assets are protected from any claims placed against them from the creditor.
Advantage #2: Limited Red Tape
Of the formation of an LLC is its ease of creating.
For the most part, the business owner simply writes up how the articles of organization will be followed, create the necessary forms required by the laws of the registering state, and submit those documents to the secretary of state for the state in which they file as an LLC.
In addition, some fees are associated with this filing. This is in extreme contrast to other business forming structure models that necessitate the filing of extensive paperwork.
Advantage #3: Limited Taxes
Of course, as with all income, the IRS is very interested in receiving its share.
However, one of the primary benefits of an LLC, as it relates to taxes, is that all profits in their entirety go directly to the owners.
This means that there are no taxes by the federal government taken out of any profits initially.
This is very beneficial because it allows for the owner of the LLC to claim any revenue from their company through their income tax returns.
There is no company reporting to the IRS only income from the owner of the company on their own personal returns.
This simplifies the filing of taxes and is much easier than corporations and other companies who have to submit complicated corporate returns.
In essence, an LLC is defined as a “pass-through” business structure.
The advantage, because of this consideration, is an LLC avoids the income-draining process of being doubly taxed on corporate income as well as money drawn by the owner.
Also, by law, an LLC is not required to pay unemployment insurance taxes for the owner of the company.
Advantage #4: Limited Salary
Another positive advantage of an individual using the LLC company structure is that they have access to the liquid funds available through the company’s business dealings.
Per se, they are not paid a salary but can withdraw the money required to pay for their business and personal expenses.
Related: How to Save Money from Salary.
Advantage #5: Managerial Freedom
When it comes to running a business, managers do not like to have their decision-making hands tied.
However, in most cases, within the business, some sort of accountability needs to take place. Therefore oversight is needed to manage the managers.
Sometimes this is done through supervisors or members of a board to which the manager is held accountable for their decisions.
Consequently one of the powerful advantages of operating an LLC is that the owner has no such restrictions placed upon them.
In essence, the success of the company and the decisions that are made rise and fall with the sound or foolish decisions that are made by the manager.
So, as an LLC owners do not have a formal structure about how the business is run and oversight by others.
Advantage #6: Limited Public information
The advantage to some companies choosing this business structure is the possibility of limiting public information.
Varying from state to state, each has its requirements in regards to members of the LLC being revealed on the documents that comprise the LLC.
In some cases, states may simply require the listing of the manager rather than all the leadership members of the business.
Also, a beneficial privacy option that some states adhere to is known as the registered agent.
This simply means that the registering agent on the documentation is listed along with their mailing address on all official documents.
This is a significant privacy advantage in that it doesn’t require the manager to list their home address.
This is an especially helpful privacy option as some of these states will not allow a P.O. address to be listed as the business address.
4 Disadvantages of Private Limited Company
Disadvantage #1: Funding
One of the significant negatives when it comes to an LLC is attaining needed money to keep the operation afloat.
Specifically, like any other business, an LLC will experience good times and not-so-good times where the cash flow ebbs and flows accordingly.
Consequently, sometimes a line of credit is needed to pay the expenses and keep the doors open.
With an LLC this becomes a little bit more difficult because of the way the LLC is structured without any board to manage the owner of the LLC as well as the LLC having more of a “loose” business structure.
It seems then that lending institutions, in providing loans to LLCs, may take on greater risk and of course, can be a detriment to the loan process as well as requiring higher interest rates.
Disadvantage #2: Filing Fees
Although the formation of an LLC is less involved than other business structures, there is a price to pay for the ease of this process.
Specifically, the expense to register as an LLC in one of the 50 states generally costs more. The fee will vary from state to state.
In addition, there may be required annual fees to pay.
Also, most states charge filing fees back to the LLC when various reports are filed such as an annual report or franchise fees, or both.
Disadvantage #3: Taxes
As alluded to earlier, one of the powerful advantages of operating within an LLC structure are tax advantages.
However, it can also be argued that the taxes for an LLC could be a disadvantage as well.
As part of the LLC structure, the owner files their taxes as a self-employed individual.
This is a separate dynamic when filing the taxes in that the owner captures all of their income and expenses on the SE form within the parameters of the IRS tax code.
This self-employment income is subject to the taxes imposed by the Social Security system as well as paying into Medicare.
Disadvantage #4: Ineligibility
As with all things, there are certain qualifiers. In other words, one size doesn’t fit all.
Therefore, it is important to know that certain businesses that operate within a community are not eligible to form an LLC.
Shortlist of those institutions or services that are not eligible to be an LLC include banks and insurance companies.
Additionally, the requirements for LLCs can vary from state to state. Consequently, some states do not allow certain professional companies to be sheltered under the LLC business structure.
Examples of those types of businesses or services include attorneys at law and doctor’s offices.
Other related financial questions you might want answers to:
- How Much Money Should I Spend on a Car?
- How Many Bank Accounts Should I Have?
- How Much Money Should I Spend on Groceries?
- How Can I Retire at 60 Years With 500k?
- What Happens to 401k When You Quit?
- How Old Do You Have to Be to Get a Debit Card?
Ready, Set, Go
Looking to start a company?
You are up to the challenge and believe that the skills, business savvy, and experience that you have will be the perfect foundation for a successful business in your community.
The service or product that you will be providing will meet a specific need in your “own backyard” and customers will be appreciative.
Your business plan has been created, the budget is in order, the name of your company has been selected and filing for a business license has been accomplished.
You are off to a good start by investigating the various business structures that are available to you and now you are ready to file your legal documents with the local authorities.
Ready, Set, and Go Get ‘Em.
In taking your place in the business world you are demonstrating your vision and rolling up your sleeves to make your vision come true.
The business race that lies ahead of you is not a sprint, it is a marathon.
You are not afraid of hard work and you are building on the shoulders of other business visionaries who have passed on to all of us the proven success of capitalism.
This form of economy has and will continue to make American the truly great country that it is.
Congratulations because starting a business makes you part of the important backbone and heart of America’s economy.
Your vision and attaining that vision will help to secure America’s economic future.