PRIVATE COMPANY




Senathon Ipia


Definition of Private Company
A private company is a business owned by 2 to 50 shareholders and is a separate legal entity from its owners.

That is, a private company would have a minimum of 2 shareholders but a maximum of 50 shareholders.

A private company has its name ending with the word “Limited”, often abbreviated as “Ltd”.
An example of a private company would be: Senaipia Limited.

Features/Characteristics of a Private Limited Company
(i)  Must have a minimum of 2 shareholders and a maximum of 50 shareholders.
(ii) It is a separate legal entity from its owners.
(iii) Limited Liability: The liability of the shareholders (owners) is limited to the amount contributed as share capital, or unpaid amount for the company’s shares already subscribed to. And the debts of the business can only be paid from its assets – Not from the assets of its owners. 
(iv) No sale of its shares to members of the public. That is, the shares of a private company are NOT transferable, or there is NO transfer of shares with a private company.
(v) The shares are NOT quoted on the stock exchange, since the shares are NOT transferable.
(v) Perpetual existence. The death of a shareholder does NOT mean the end of the business.
(vi) Non-publishing of its financial statements since it NOT a public company but a private company. (A private company is not required to publish its financial statement).

Note: Financial statements are prepared from the accounting books of the company.


Sources of Capital or Finance of Private Limited Company
The money used to start and run a private limited company (Ltd) comes from the following sources:

(i) Shares – ordinary shares or preference shares or both. This is capital raised from issuing shares. The money raised is known as share capital – it is the equity capital of the company. It is contributed by the shareholders through buying of shares.

(ii) Debentures or corporate bond: This is debt capital raised from long-term borrowing.

(iii) Commercial bills: It is also called commercial paper. This is debt capital raised as short-term borrowing.

(iv) Bank loan: This is borrowing from a bank, and could be a short-term, medium-term, or long-term loan. Bank loan is another debt capital.

(v) Bank Overdraft: Overdraft is when a commercial bank allows a current account holder with the bank to withdraw more money than what is in the current account of the customer with the bank. A company can obtain overdraft from the commercial bank it banks with. Overdraft is also a debt capital.

(vi) Trade credit: This is refers to buying goods on credit from suppliers. Such debts are expected to last for few months; so it is similar to short-term borrowing.

Note: In business, credit sale/credit purchase is a form of financing, and of course, capital.

(v) Retained profits: These are profits (i.e. money) not distributed to shareholders. The retained profits are ploughed-back as capital. That is, put back as capital into running the business.

(vi) Hire purchase: This is when a company buys an asset, pay some deposit now and settle the balance by making periodic installmental payments. Hire purchase is a form of credit financing.

Hint: Individuals can make hire purchase – it’s NOT only for business organizations.


Reasons for Incorporating a Private Limited Company
The reasons for incorporating a business as a private company are:

(i) Ability to raise more capital than sole proprietorship and partnership. Pooling together money capital from a maximum of 50 shareholders implies more capital.

(ii) Limited liability for the owners (shareholders). If the company goes bankrupt, the owners only lose the money they have invested or have agreed to invest as share capital in the business.

Note: To be bankrupt means to be unable to pay one’s debts – whether as a business, or an individual.

(iii) Separate legal entity from its owners. The business is different from its owners – it is an artificial person – it can sue and be sued in its own name.

(iv) Perpetual existence. The death of a shareholder does NOT mean the end of the business.



Senathon Ipia is a Chartered Accountant with the Institute of Chartered Accountants of Nigeria (ICAN).



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