Pros and Cons of Setting Up a Private Limited Company

There are many factors we consider when starting a business, but one question that is on everyone’s mind is whether to form a Private Limited company or not.  

There are many benefits for foreign investors as well as Indian business owners who wish to establish private limited companies in India, particularly for medium and big businesses. For your consideration, we’ve listed some of the benefits and drawbacks of forming in India below.     

What is a Private Limited company?

A private limited company is a business legal entity that is owned by small business owners in India and has a minimum of two and a maximum of fifty members. A private limited company requires a minimum of 2 (two) directors, at least 1 (one) of whom must be an Indian resident. The Indian Companies Act, 2013 and its implementing regulations control private limited companies in India.

A Private limited company is the most popular form of company registration. It is the most suggested type of business entity for the vast majority of small and medium-sized enterprises, whether they are family-owned or managed by professionals, due to the limited liability protection provided to shareholders, the ability to raise equity funds, and the separate legal entity status.   

Advantages of Setting Up a Pvt Ltd Company

1. Limited Liability

Borrowing is a common necessity for setting up a Pvt Ltd company. In structures like general partnerships, every partner is fully responsible for all debt raised. The partners will be requested to liquidate their personal assets to pay off the partnership’s debts. 

However, in a private company, the directors’ and shareholders’ personal assets would be saved from any business-related risks and would only lose the initial investment.  

2. Separate Legal Entity

The assets and liabilities of a Private Limited Company are distinct from those of the Directors since the company has its own legal identity in the court of law. They both count differently. Because Management and Ownership are divided in a Private Limited Company, managers are accountable for both the company's success and failure.

3. Easy Fund Raising  

One of the major benefits of setting up a Pvt Ltd company is that you can easily raise funds from Venture Capitalists or Angel investors. Such organisations also benefit from limited liability. Indeed, private equity funds and venture capitalists are unlikely to invest in any other type of corporate structure. 

4. Easy Transfer of Shares

The shares of the private limited company can be transferred easily, unlike other types of legal entities established in India, because its existence is independent of its shareholders or directors. It is easy to transfer shares by completing a share transfer form, signing it, and giving the share certificate to the buyer. 

5. Builds Credibility

A public database contains information about the company. This boosts the company's credibility by making it simple to verify the information.

6. Uninterrupted Existence 

A private limited corporation has 'Perpetual Succession,' which means it will survive until it is legally dissolved. A business, as a separate legal body, does not get affected by the demise or other withdrawal of any member and continues to exist regardless of membership changes. 'Perpetual Succession' is one of the most important benefits of a company.

7. Tax Benefits 

Setting up a Pvt Ltd company has more tax benefits in comparison to other types of legal entities established in India. The Government of India recently provided a number of subsidies to lower the corporate income tax that an Indian private limited company must pay. In India, a private limited company’s income tax rate typically ranges from 15% to 30%, depending on the company’s revenue and industry.    

Disadvantages of Setting Up of Private Limited Company 

Setting up a pvt ltd company is not ideal for all businesses. Look at some of the drawbacks of a private limited company. 

1. Compliance Formalities 

After setting up a Pvt Ltd company, the business owner must comply with a number of regulations. Every year, all businesses must keep a statutory register, hold board meetings and general meetings, have their financial records audited and file annual income with the Ministry of Corporate Affairs. 

A corporation would also need to comply with labour and tax laws, which are relevant regardless of the kind of business entity, in addition to corporate compliance requirements.   

2. Division of Ownership

One of the main disadvantages of setting up a Pvt Ltd company is that it needs a minimum of two directors to function as directors and shareholders.  So a sole proprietorship that wants to establish and run a firm alone cannot do so through the formation of a private limited company. 

3. Winding up

Winding up a private limited company can be difficult, expensive, and time-consuming as compared to an unregistered partnership firm. Therefore, it's crucial to register a company only when the promoters are committed to using it to run a business.

Conclusion 

A private limited company is the most well-liked and popular legal entity for conducting business in India, despite the drawbacks mentioned above. Before choosing a business entity for your firm, you should think about the many benefits of establishing and operating as a private limited company. For any further queries, you can contact Online Legal India’s expert, who can also make you understand every process regarding any registration or FSSAI license.