The benefits of private limited company over all other types of businesses such as proprietorships, partnership firms, Limited Liability Partnerships, One Person Companies, and public limited companies, has made it the most preferable choice among young startup owners. This article has been written with the purpose to inform and educate readers about all the benefits of private limited company, so that an informed choice can be made on their legal statuses during their information.
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As the third-largest startup ecosystem globally, India has been witnessing a sharp rise in the number of newly established businesses across industries, in the past couple of years. Most of these businesses start operating at a smaller scale and cater to the demands of the local customers only. They record low turnovers and profits, thereby, discouraging investors from investing the required capital into the businesses. However, startups continuously aspire to make it big in their respective industries and garner the desired amount of capital for the growth and expansion of their businesses. Hence, It is often recommended that they get incorporated and avail of the benefits of Private Limited Company.
| S.No | Benefits of Private Limited Company List |
|---|---|
|
1. |
Limited Liability for owners |
|
2. |
Attractive for Investors |
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3. |
Preferred for funding by banks and financial institutions |
|
4. |
Simple and easy to incorporate |
|
5. |
Low income Tax |
|
6. |
Perpetual Existence |
Top 10 Benefits of Private Limited Company
There are several benefits of Private Limited Company over other types of business entities. Private Limited Companies are not only easy and affordable to incorporate, but also carry credibility as legally incorporated entities. Besides, they are exempted from several mandatory legal compliances under the Companies Act 2013. As a legal entity, they also enjoy the power to sue third parties in a court of law. Moreover, features like limited liability for owners, a complete separation between ownership, business, and management, and no minimum requirement of authorized capital for setting up the business, make private limited companies an affordable and profitable venture to establish and operate.
1. Limited Liability
Limited Liability is the first among the many benefits of private limited companies. Unlike proprietorships, and partnerships, private limited companies exist as separate legal entities from their shareholders. Neither do the shareholders pocket all the gains nor are they liable for all the losses of the company. The income and the liability of the company are distributed among all shareholders according to a predetermined ratio, agreed upon by the unanimous consensus of all shareholders, prior to the incorporation of the company. Limited liabilities for shareholders are not only an attractive feature for investors but also a characteristic that provides them with immunity against financial impoverishment, in times of crisis. Hence, this becomes one of the best benefits of Private Limited Company in India.
2. Attractive to Investors
Private Limited Companies are attractive for investors owing to its high potential for growth and historical records of success in the Indian market. Further, a Private Limited company is a popular name in the domestic as well as Indian market, and sounds more convincing to entrepreneurs looking forward to making it big in their respective industries . Some of the big business brands and industrial monopolies like Parle, Google, American Express, Cocacola, and Jaguar are all Private Limited Companies. You can find plenty of similar examples in Indian and global markets. This is exactly why a private limited company is considered as the best choice of business structure for startups.
3. Preferred by banks and Financial Institutions
Private Limited companies are entities that require mandatory registration with the Registrar of Companies under the Ministry of Corporate Affairs. The process of registration is primarily governed by the Companies Act 2013 and the Company Incorporation Rules 2014, along with several other provisions mentioned in statutes like the Trademark Act, Names and Emblems Act, Income Tax Act, GST Act, EPF Act, ESIC Act, Shops and Establishment Act, Contracts Act, SEBI Act, etc.
Registrations, approvals, certificates, and licences obtained under all these acts, helps the government in maintaining publicly accessible databases containing relevant information about the companies. This enhances the credibility of private limited companies, as government databases carry absolutely authentic and verified information about them. Consequently, investors and creditors remain assured that their money is landing in safe hands.
Contrarily, businesses like proprietorships and partnerships that remain unregistered, compromise their credibility, as their existence cannot be found on any government databases or registers. Credibility among investors is one of the major benefits of Private Limited Company.
4. Perpetual Existence
The life of a company does not depend on the life of its owners, as a company has a legal identity of its own. This means that a private limited company shall continue to exist even after the death, resignation, retirement, removal, insolvency, or proven insanity of a shareholder. It shall only cease to exist when wounded up or voluntarily dissolved. The reason for the perpetual existence of a company lies in the fact that it can have as many as 200 shareholders at a time. Besides, the shares they hold can be easily transferred to new owners, in case of their departure from the company.
This feature of a private limited company is different from business entities like proprietorships or partnerships, where the business and the owner are one and the same, in the eyes of law. The death or departure of a proprietor or partner means an immediate dissolution of their respective businesses. Additionally, after the death of a partner, the partnership deed of a firm automatically terminates. Among the many benefits of Pvt ltd company, this benefit assures its indefinite existence.
5. Low Income Tax
Section 80IAC of the Income Tax Act offers 3 consecutive financial years as tax holidays for shareholders of startups registered either as a private limited company or an LLP. A low cost burden of legal and tax compliances is one of the most significant benefits of Private Limited Company.
6. Easy to incorporate
The introduction of the SPICe+ application has made the process of company registration completely online. SPICe+ / INC 29 is an online application for the registration of a company and 10 additional services from the Ministries of Finance, Labour, and Corporate Affairs. These include applications for DIN, PAN, TAN, registrations under GST, PT, EPF, ESIC, and Shops & Establishment Act, and opening a current bank account for the company.
Besides, PART A of the form, which can be submitted either individually or with the entire application, contains the RUN form for the name reservation of the company. Integrating all these forms together has certainly reduced the paperwork, time, and cost of incorporating a private limited company in India. An easy, simple, and 100% online process of incorporation is one of the major benefits of private limited company.
7. Low minimum and high maximum limit of shareholders
A private limited company in India requires only 2 shareholders to get registered and start operations. This provides leverage to smaller companies, as they struggle to attract investors in the market, especially during the initial years of their business. Besides, as the maximum limit of shareholders is as high as 200, companies shall have the option of garnering huge investments in the later stages of their business.
Such flexibility is especially beneficial for startups that wish to start local, but have huge aspirations to become global without facing any financial restrictions. This is quite contrary to a public limited company which requires at least 7 shareholders to commence operations, although their maximum limit is indefinite. Therefore, while public limited companies shall have the option of expanding themselves to any limits, the necessity to begin large, will probably discourage startups from choosing it as their legal status.
8. No minimum and maximum capital requirement
The Indian government has changed the minimum capital requirement for private limited companies, from 1 lakhs to nil. This means that a business can register itself as a private limited company with no authorized capital as well. This rescues startups from being at a disadvantage compared to other established businesses, as they struggle to arrange capital in the initial years of their business. Additionally, private limited companies do not have a maximum capital limit as well, allowing them to gather as much investment as they need without any restrictions.
9. No mandatory requirement to appoint an audit committee
Section 177 of the Companies Act mandates the Board of Directors of all listed and public companies to set up an audit committee to improve the quality of decisions of the BoD regarding the financial management of the company. The mandatory appointment of the committee not only increases its cost of compliance but also invites huge monetary penalties in the case of non-compliance. Fortunately, the private limited companies are exempted from this mandatory requirement as they are neither listed nor are their shares publicly held. Additionally, the committee must be formed with at least 3 directors, whereas the minimum number of directors for starting a private limited company is only 2.
10. Power to sue
As legally incorporated entities, private limited companies can sue third parties in a court of law to resolve disputes over a slew of matters. All documents including contracts, agreements, and memorandums agreed by the company, shall be admissible in a court of law. An unregistered entity lacks this privilege and hence remains unable to protect its rights in case of conflict with third parties.
Conclusion
Startups often face multiple dilemmas while deciding whether to incorporate their businesses or not. This is primarily due to the hefty cost involved in the process of incorporation and related compliances, which startups struggle to afford in the initial stages of their business. However, they often fail to realize that the disadvantages and penalties for not getting incorporated, far exceed the cost of incorporation. As far as the legal status is concerned, startups are anyway permitted to get incorporated as a private limited company, an LLP, or a partnership firm only. Out of these, a private limited company is the most viable option, especially when compared to the other two. The reasons for the same have been discussed above to provide a thorough understanding of the benefits of private limited companies in India.
FAQs
Q1: What is a private limited company, and why should I consider registering one?
A private limited company is a type of business entity incorporated under the Companies Act of 2013. It offers limited liability to its shareholders while restricting the transfer of shares to investors only, implied that the shares cannot be traded to the public. Moreover, private limited companies cannot trade their shares publicly on platforms like Stock Exchange Markets. Registering a Private Limited Company is a mandatory compliance under the Companies Act, 2013. Besides, private limited company registration also offers a number of advantages like low tax requirements, easy and cost-effective incorporation, credibility and transparency in conducting transactions, and so on.
Q2: What are the tax advantages of registering a private limited company?
Private limited companies often enjoy tax advantages such as lower corporate tax rates, eligibility for 100% tax exemption under Section 80IAC of Income Tax Act, and the ability to split income between the company and its shareholders. Additionally, certain expenses related to business operations can be claimed as tax-deductible, reducing the overall tax liability of the company.
Q3: How does private limited company registration help in raising funds?
Registering a private limited company makes it easier to raise funds through various channels. With limited liability protection, investors are more willing to invest in the company, as their personal assets are not at risk..
Q4: What is the ownership and management structure of a private limited company?
In a private limited company, ownership is divided into shares held by multiple shareholders. These shareholders elect a board of directors responsible for the company’s management. The day-to-day operations are overseen by the company’s management team, led by key officers such as the CEO, CFO, and others. This structure provides a clear separation between ownership and management roles.
Q5: What are the potential disadvantages of private limited company registration?
While private limited companies offer various benefits, they also come with potential disadvantages. These include more complex legal and compliance requirements compared to sole proprietorships or partnerships. Private limited companies are required to maintain accurate financial records, hold annual general meetings, and adhere to specific reporting standards. Additionally, decision-making can sometimes be slower due to the involvement of multiple shareholders and the need to follow proper corporate governance practices. Converting shares into cash might also be more complicated than withdrawing funds from a sole proprietorship. It’s important to carefully weigh the disadvantages of Private Limited Company against its benefits before proceeding for registration. .