When starting a new business venture, one of the most important decisions entrepreneurs need to make is choosing the right legal structure. This determines how the business will be formed, owned and managed. While sole proprietorship and partnership are simpler options, incorporating as a private limited company has several long-term benefits. It provides liability protection, separate legal identity, affordable fees for registration of private limited company, continuity of business, ease of ownership transfer and more credibility. In this article, you will explore the top 10 key advantages of registration as a private limited company in India and how it can help businesses grow successfully.
One of the biggest advantages of incorporating as a private limited company is limited liability. As a shareholder of the company, your personal assets are protected in the event the business suffers losses or is sued. You are only liable up to the value of your shares in the company. This means your primary personal assets like your home, vehicle, savings, investments and other personal possessions are safeguarded from any business debts or legal claims against the company.
As a sole proprietor or partner in a partnership firm, you would be personally responsible for all the debts and liabilities incurred by the business. If the business is unable to repay its debts, creditors can make a claim against your personal assets to recover dues. This places your personal wealth at high risk. By registering as a private limited company, an entrepreneur can run their business without the threat of personal bankruptcy if the venture fails or faces unforeseen liabilities.
Separate Legal Entity
When you incorporate as a private limited company, it becomes a separate legal entity that is distinct from its owners. This means the company can enter into contracts, own assets, incur debts, sue others and be sued separately from the shareholders. It is treated as a distinct “person” under law, with an identity of its own. The company has its own Permanent Account Number (PAN) issued by the Income Tax Department for filing income tax returns and TDS purposes. It can open its own bank accounts to conduct financial transactions.
It also has separate registrations for Goods and Services Tax (GST), professional tax and other applicable tax registrations based on its business activities. This makes business transactions simpler as all legal, financial and tax related matters can be directly handled in the company’s name without involving the personal assets or names of individual shareholders. The company can directly enter into business contracts and agreements, purchase assets, take loans and resolve disputes in its own capacity.
Continuity of Business
As a private limited company, the business continues even if one of the shareholders leaves, dies or becomes insolvent. The remaining shareholders or new shareholders can carry on with the business seamlessly. This ensures continuity and stability for the business. In contrast, if a sole proprietor passes away, the business ceases to exist. Similarly, if a partner leaves or dies in a partnership firm, it may require dissolution of the firm.
Easy Transfer of Ownership
Shares of a private limited company can be easily transferred or sold to a new owner. This allows existing shareholders to monetize their investment by selling their shares. It also enables easy admission of new shareholders. Transferring ownership of a sole proprietorship or partnership involves more legal procedures. This makes it simpler to bring in new investors, sell part or all of the business.
Incorporating as a private limited company provides certain tax benefits. The company pays tax on its profits at a flat rate which is generally lower than the highest personal income tax rate. Dividends received by shareholders are also taxed at a lower rate. There are also tax deductions available for expenses incurred by the company. Overall, a well-planned limited company structure can help minimize taxes legally.
Credibility and Reputation
Operating as a private limited company provides more credibility and recognition compared to unincorporated structures. It projects an image of a professionally managed, established organization. This inspires more confidence among customers, suppliers, bankers and investors to do business with the company. The limited liability status also reassures stakeholders about their investment being safe.
Access to Financing
It is easier for a private limited company to obtain loans and financing from banks compared to other structures. Banks view limited companies more favorably as separate legal entities with limited liability. The company can use its assets as collateral to secure loans for working capital, expansion, acquisition etc. Various financing options like angel investment, venture capital are also available only to incorporated companies.
Formal Management Structure
A private limited company requires maintaining proper statutory records and following legal procedures. This instills financial discipline and a formal management structure within the organization. Key roles like directors and company secretary are formally defined with clear responsibilities. Maintaining minutes of board meetings, annual filings ensure accountability and transparency in operations. This lends professionalism to running and scaling up the business over time.
The limited company structure is recognized globally as a standard business format. This makes it easier to expand internationally in future. The company can open foreign branch offices, subsidiaries in other countries. It also becomes simpler to attract global investors, customers and forge strategic partnerships. Various trade agreements recognize private limited companies for facilitating cross-border business.
Private limited companies offer flexibility to change the shareholding structure, management and operations as per evolving business needs. Additional shareholders or directors can be inducted. Company’s objectives and activities can be modified through shareholders’ resolution. The company’s shares can be publicly listed on stock exchanges in future for raising capital if the business grows substantially. Overall, this legal structure grows with the business in a flexible yet regulated manner.
Incorporating as a private limited company provides numerous long-term benefits for a business. While initial private limited company registration cost are involved, the advantages far outweigh unincorporated structures in the long run. It helps protect personal assets, attract financing, gain credibility and manage operations professionally as the business grows in scale and complexity. Choosing the right legal structure is a crucial decision and private limited company is a popular option for many successful businesses in India.