Disadvantage of Being a Private Limited Company

by Alison Green; Updated September 26, 2017

When starting a business in the United Kingdom, one option is to structure your operation as a private limited company, which is similar to a limited liability company in the Unites States. Although private limited companies have a separate legal identity from their owners and enjoy some tax breaks, shares cannot be traded in a stock exchange, business information is made public, and founders may emerge with limited personal control.

Restricted Access to Capital Markets

Unlike public limited companies, private limited companies are legally restricted from issuing their shares through an initial public offering. As such, they cannot trade their shares on a stock exchange. With this restriction, private limited companies may find it difficult to attract outside investors to buy the shares. In addition, a shareholder of a private limited company typically must seek the approval of the company's directors before selling or transferring his shares to a new owner, or offer them to existing shareholders first. This amounts to an inefficiency, since investment decisions may not be made and executed in a timely manner.

Increased Legal Compliance

Since private limited companies have a separate legal identity from their owners, they must comply with more legal requirements than sole proprietorships and partnerships. For instance, private limited companies must submit annual financial accounts to the Companies House at the end of each financial year and report a number of changes, including appointment of a tax professional, to HM Revenue and Customs.

As a result of increased legal compliance, key private limited company documents -- including primary business activities, annual accounts and returns and directors' details -- can be accessed by the general public through the Companies House. According to, Arthur M. Borden and Joel A. Yunis, authors of the book Going Private, information disclosure can make an entity competitively disadvantaged. Competitors -- especially those not required to disclose any documents -- can access that information and use it to improve their own businesses.

Higher Administration Costs

As a legal obligation, private limited companies must appoint at least one director, who also may be a shareholder. In many cases, they also hire a company secretary, and other professionals like accountants to ensure accurate reporting and avoid late filing penalties. Since this can increase the general and administrative expenses of a business, it costs more to set up and run a private limited company than it is to be a sole trader.

Limited Personal Control

Unlike in sole proprietorships, founders of a private limited company don't have total control over the entity’s operations. When founders decide to privately issue shares to others, they invite more owners into the business. With reduced control, founders typically cannot make and execute important decisions without consulting with other shareholders.

About the Author

Based in New York City, Alison Green has been writing professionally on career topics for more than a decade. Her work has appeared in “U.S. News Weekly” magazine, “The Career” magazine and “Human Resources Journal.” Green holds a master's degree in finance from New York University.