The benefits of registering a private limited company in India 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 have low turnovers and profits, which doesn’t excite investors enough to invest into such businesses. While, startups continuously aspire to grow enormously in their respective industries catering to a large number of clients; not only nationally but also globally. Due to this feature of the startups, they can attract the necessary amount of capital for the growth and expansion of their businesses. Hence, It is often recommended to get startups incorporated as a private limited company to reap the benefits.
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.
Play Video about What are the Benefits of Private Limited?
1. Limited Liability
Limited Liability is the first among the many private limited company benefits. 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 one of the attractive advantages of pvt ltd company 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, Coca-cola, 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. It is one of the major pvt ltd company benefits.
3. Preferred by banks and Financial Institutions
Private Limited companies are entities that require mandatory registration with the Registrar of Companies (RoC) 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 gather and maintain necessary databases of the registered companies so that the general public can access it easily to ensure transparency across the industry. This enhances the credibility of private limited companies, as the government databases carry absolutely authentic and verified information about them. As a result, it also assures investors and creditors about their money that it is at lower or minimal risk.
On the contrary, businesses like proprietorships and partnerships firms that are not yet registered, don’t have credibility similar to those registered ones. The reason is that their existence cannot be found and verified as no details of such businesses exist in the databases or registers of the government.
Credibility among investors is one of the major advantages of a Private Limited Company.
4. Perpetual Existence
A private limited company’s existence does not depend on the lifespan of its owners, as a company has a distinct legal identity of its own. It means that a private limited company shall continue to exist even in some adverse cases like death, resignation, retirement, removal, insolvency, or proven insanity of any 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 can be registered with as low as only 2 shareholders and commencing its operations. It offers multiple benefits to smaller companies, as they struggle to attract investors in the market, especially during the initial years of their business. Moreover, as the maximum limit of shareholders is 200, companies shall have the option of obtaining huge investments in the later stages of their business based on their genuineness.
Such flexibility is extremely helpful for the startups that wish to start locally, but with high aspirations to scale up themselves to the global level without facing any financial barriers. This is quite contrary to a public limited company which requires at least 7 shareholders to commence operations, although their maximum limit is indefinite. 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. It safeguards the startups from the disadvantages 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 contributes to increase compliance cost but also attracts 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 their shares are 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
Being legally incorporated entities, private companies have the right to sue third parties in a court of law for disputes. All documents including contracts, agreements and memorandums agreed by the company shall be admissible in a court of law. While an unregistered entity doesn’t have this privilege and hence it is unable to protect its rights in the condition of conflicts with third parties.
Startups often face multiple dilemmas when it comes to deciding whether to incorporate their businesses or not. It’s because of 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 are far higher than the incorporation cost. As far as the legal status is concerned, startups are anyway eligible to get incorporated as a private limited company, an LLP, or a partnership firm only. Among these, a private limited company is the most viable option, there are various pvt ltd company benefits as compared to the others.
This piece of writing provides you with 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 my startup as a pvt ltd company?
A private limited company is a type of business structure which is incorporated under the Companies Act of 2013. It safeguards shareholders’ personal assets by providing them with limited liability to the company along with restricting the transfer of shares to investors only, implied that the shares cannot be traded to the public.
Private limited companies are not eligible to trade their shares publicly on Stock Exchange Markets. Private Limited Company Registration is a mandatory compliance under the Companies Act, 2013. Private limited company registration also offers a broad number of advantages to a business; low tax requirements, cost-effective incorporation, limited liability, perpetual existence, credibility and transparency in conducting transactions, to name a few.
Private limited companies are not eligible to trade their shares publicly on Stock Exchange Markets. Private Limited Company Registration is a mandatory compliance under the Companies Act, 2013. Private limited company registration also offers a broad number of advantages to a business; low tax requirements, cost-effective incorporation, limited liability, perpetual existence, credibility and transparency in conducting transactions, to name a few.
Q2: What are the tax advantages of registering a private limited company?
Private limited companies are eligible to enjoy a number of tax advantages such as reduced corporate tax rates, sometimes 100% tax exemption under Section 80IAC of Income Tax Act, and can also split their income between the company and its shareholders. Apart from that, certain expenses related to business operations can be claimed as tax-deductible, hence, reducing the overall tax liability of the company.
Q3: How does private limited company registration help in raising funds?
Registering as a private limited company makes it easier to attract funds through various government & non-government financial entities or channels. Due to its feature of limited liability, investors are more attracted to this form of business structure, as their personal assets are free from the risk of getting seized for repaying any debt on the company.
Q4: What is the ownership and management structure of a private limited company?
Ownership in a private limited company is divided into shares which are often held by multiple shareholders. These shareholders of the company elect/appoint a board of directors responsible for managing the organization. The management team is responsible for regulating and overseeing day-to-day operations of the company and it is led by key officers such as CEOs, CFOs, and many others. There is a clear separation between ownership and management roles of the company.
Q5: What are the potential disadvantages of private limited company registration?
With various benefits of private limited companies, some disadvantages are also associated with it. Primarily, the disadvantages of pvt ltd company are more complicated legal and compliance requirements than proprietorships & partnerships.
Private limited companies also need to maintain their financial records accurately, hold annual general meetings, and adhere to specific standards of reporting.
Decision-making can sometimes be slower due to the involvement of multiple shareholders and therefore, implementation of proper corporate governance practices can be complicated.
As compared to sole proprietorships, converting shares into cash might also be more challenging in a private limited company. It’s important to carefully consider the Private Limited Company advantages and disadvantages before registering your startup as a private limited company.
Private limited companies also need to maintain their financial records accurately, hold annual general meetings, and adhere to specific standards of reporting.
Decision-making can sometimes be slower due to the involvement of multiple shareholders and therefore, implementation of proper corporate governance practices can be complicated.
As compared to sole proprietorships, converting shares into cash might also be more challenging in a private limited company. It’s important to carefully consider the Private Limited Company advantages and disadvantages before registering your startup as a private limited company.
I’m pleasantly surprised by the low income tax rates offered to shareholders of startups registered as private limited companies. It’s a significant incentive for entrepreneurs like me to take the leap and formalize our businesses. Thanks for sharing this useful information with us. I will try to visit your blog again for more useful information.