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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.