Company Registration

9 Reasons to Form a Private Limited Company

Any entrepreneur thinks about the kind of entity he/she wants to form when commencing a new business venture. This is a vital business decision as it is likely to have long-lasting implications on the business. The Indian Corporate Law gives individuals multiple choices in the kind of companies that they can form when they plan to start a new business. Few of the available options are – Private Limited Company, Public Limited Company, Company limited by shares, Company limited by guarantee, Unlimited company, etc., among the other options.

This article discusses the Reasons to Form a Private Limited Company. Firstly, let’s begin with understanding the meaning of a private company.

What is a Private Company?

Section 2(68) of the Companies Act, 2013^[1], defines a Private Company. A private company under the Indian Laws means a company which via its articles-

• Puts a restriction on transfer of its shares; and
• Can have up to a maximum of 200 members (except in the case of a One Person Company).

There is no minimum paid-up share capital requirement for a private limited company.

If two members of the company held a share jointly, they will be treated as a single member.

The following shall, however, not be treated as the members of the company:

• Individuals in the employment of the company;
• Individuals who were members of the company while being in the employment of the company and continued being members once their employment with the company ceased.

Reasons to Form a Private Limited Company

The following are the advantages of Reasons to Form a Private Limited Company:

1. Separate Legal Entity

A Private Limited Company has a separate legal entity from its members and shareholders. This means its existence is not subject to the death, retirement, etc., of its members and it will continue to exist until it is legally wound-up.

It is also not tied-up to its promoter(s). This means that the company can own properties and incur debts. A Private Limited Company has the capacity to sue and be sued in its own name.

The company can also borrow by issuing debentures and deposits or straightaway from the financial institutions.

A Private Limited Company is a separate legal entity from its members and promoters. It can sue, be sued, borrow and lend in its own name.

• Limited Liability

This is one of the core advantages of a Private Limited Company. As a Private Limited Company exists as a separate entity from its members, its liabilities would be separate from that of its members.

The responsibility of the debts taken by the company would be of the company and not of the members.

The liability of the members is only subject to the number of shares that they hold as opposed to the case of sole proprietorship or partnership, where the owners have to bear the entire burden of the debt.

Hence, in case the business ends up in huge losses, the members would not have to bear the entire burden of the debts.

The liability of the members/shareholders is limited to contributing to the nominal value of shares.

• Savings in Tax

There can be a considerable amount of savings in tax since the rates of corporation tax are lower than the rate of the income tax. Provision of payment of dividends to the shareholders is also given to private limited companies.

As payment of dividends attracts less tax deduction in comparison to the payment of salary, the shareholders can benefit from the same. It can also be beneficial for the employees as they can get pension contributions if the employer is a Private Limited Company.

The payment of pension is also a tax-deductible expense, thereby, givinga tax benefit to the company.

A Private Limited Company makes tax savings in the form of lower corporate tax rates, payment of dividends to its shareholders and pension payment to its employees.

• More Opportunities

If an entity gets registered as a Private Limited Company, it becomes a separate legal entity. This means that it is not attached to its promoter in any which way and the promoter is free to chase more opportunities as the business progresses more and more.

Therefore, getting registered as a private limited company gives way to a pool of opportunities which increase the growth prospects of the company manifold.

This option is not available in case of sole proprietorship as they are always tied up with the promoter.

Without any tie-up with the promoter, a Private Limited Company can avail multiple growth opportunities.

• Easy Raising of Money

Easy and quick funding is the need for any company initially to grow quickly. Since Private Limited Companies are governed by strict laws, it increases their creditworthiness and the financial institutions lend money to them easily.

Also, since private limited companies can sell their shares to the public, it is an easy funding option for them. In case of sole proprietorship, the funding can only be in the form of debts, funding by family members or self-funding.

Private Limited Companies get easy funding due to the increased creditworthiness or by selling their shares.

• Convenient Transfer of Ownership

In a Private Limited Company, the shares and other interests of members are considered to be movable property. Hence, the shares can be transferred in a manner as provided in the Articles of Association of the company.

The easy transferability of the shares of the private limited company makes it convenient for the members of the company to subscribe to or leave the membership of the company at any time.

Easy transferability of shares is a convenient way for the members to sell or buy the shares of the company at any time.

• Increased Credibility

A Private Limited Company is registered with Ministry of Corporate Affairs. While undergoing the process of registration, a company takes up the elaborate process of legal documentation and provides the MCA with information like its name, status, registered address, date of incorporation, etc.

All this information is made available at the MCA public database for investors and customers. This makes it easy for interested parties to check company information and improves the credibility of the company.

Registration with the Ministry of Corporate Affairs increases the credibility of the Private Limited Companies.

• Global Business

When a company is registered as a Private Limited Company, it gets permission to get foreign investment without any government approval. Foreign companies and investors can easily invest in Private Limited Companies.

Direct Foreign Investment opens doors for companies to take their business overseas, thereby giving tremendous opportunities for growth, even beyond national boundaries. The option of foreign direct investment is not available to sole proprietorship and partnership.

Easy FDI in Private Limited Companies increases opportunities for overseas business for them tremendously.

• Better Status and Talented Staff

The status of Private Limited Companies is very professional and adds to the goodwill of the business. These are considered to be well-established, creditworthy and investors have more trust in them as compared to the sole proprietorship..

This also attracts more talented employees as professionals look for opportunities in well-established companies. Besides, a Private Limited Company can offer its employees the option of ESOPs, which is highly valued among the employees.

Private Limited Companies carry a high reputation and attract talented employees as they can offer stock ownership and ESPO plans to their employees.

For more information on Private Limited Company or assistance on Registration of Private Limited Companies, contact us at Enterslice.