What are the characteristics of a Private Limited Company?
A private limited company (Ltd) is a legal business entity that offers limited legal protection for shareholders and places restrictions on shareholder ownership. There are three restrictions a private limited company has which are in place to protect shareholder investment and prevent a hostile takeover.
The shareholders cannot sell or transfer their shares without first offering them to other shareholders in the company. Shareholders must approve sale or transfers of shares. This protection prevents any hostile takeover by a shareholder or outside entity.
Shareholders cannot offer their shares to the general public on a stock exchange. This not only protects against a hostile takeover, but it also protects the value of company shares from association with the stock market.
Finally, the number of shareholders is restricted according to the company bylaws. Typically, a private limited company has no more than fifty shareholders. This is the balance to the hostile takeover and prevents dilution of the company stock across too many portfolios. Limiting the shareholders keeps the company manageable from a shareholder perspective making it easier to meet the first two characteristics.
A private limited company restricts the sale or transfer of its shares by the shareholders. The shareholders need consent from the other members in order to transfer their shares. Shares held within a private limited company are not publicly traded, and no offers are made for public participation. The liability of all the members is limited, which means their private assets are not at risk when the company assets are recovered due to losses, bankruptcy, or lawsuits. Death, bankruptcy, or insolvency of an individual member does not affect the existence of the company, and the company exists in perpetuity. A private limited company is not required to issue a statement of its company affairs as is the case in public limited companies. A private limited company has a limit to its maximum number of members.