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What are five disadvantages of a private limited company?

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Quick Answer

Five disadvantages of a private limited company are the issue of shares, share transfers, access to credit, risk of loss and limited growth. Private limited companies operate the same as limited companies, however their shares do not trade on a public exchange.

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Full Answer

Issuing shares, growth and share transfers are three common disadvantages of having a private limited company. Since the company is private, the company cannot issue shares to the general public and therefore cannot raise large amounts of capital through public offerings. This affects the growth of a private limited company, another major disadvantage, because the maximum number of shareholders permitted by law is only fifty. Also, law prohibits private limited companies from transferring stock to nonshareholders without the consent of the other shareholders, which can further limit growth.

Access to credit is a very big disadvantage to private limited companies because financial institutions see them as major risks. This is due to the fact that the shareholders make up the wealth of the company and if something happens to one of the shareholders, such as bankruptcy, the company's financial health immediately deteriorates. The risk of loss is also another major disadvantage for the same reasons as poor access to credit. If an unfortunate incident affects one of the shareholders, it can have a ripple effect through all the shareholders in the company.

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