24 January 2019, INDIA:
There are many things that run through our mind before starting a business and one question that comes to everyone’s mind is whether to incorporate a private limited company or not? What are the benefits of private limited companies?
Are there any disadvantages of a private limited company? There is a common understanding that incorporating a private limited company is a costly affair and it is even costly to maintain a private limited company as there are many mandatory annual compliance requirements.
So let us see what are some major advantages and disadvantages of incorporating a private limited company.
Advantages of a Private Limited Company
- Separate Legal Entity: An entity means something which has a real existence. A company is a legal entity and a juristic person established under the Act. A juristic person is a person who is not a natural person or a human being. Therefore a company form of organization has wide legal capacity and can own property and also incur debts. The members (Shareholders/Directors) of a company have no liability to the creditors of a company for such debts. Hence, a Pvt Ltd company is a legal entity separate from that of its members.
- Uninterrupted existence: A company has ‘perpetual succession’, that is continued or uninterrupted existence until it is legally dissolved. A company, being a separate legal person, is unaffected by the death or other departure of any member but continues to be in existence irrespective of the changes in membership. Perpetual succession is one of the most important characteristics of a company.
- Limited Liability: Limited Liability means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company, the liability of the members in respect of the company’s debts is limited. In other words, the liability of the members of a company is limited only to the extent of the face value of shares taken up by them. Therefore, where a company is limited by shares, the liability of the members on a winding-up is limited to the amount unpaid on their shares.
- Free & Easy transferability of shares: Shares of a company limited by shares are transferable by a shareholder t any other person. The transfer is easy as compared to the transfer of an interest in a business run as a proprietary concern or a partnership. Filing and signing a share transfer form and handing over the buyer of the shares along with share certificate can easily transfer shares.
- Owning Property: A company being a juristic person, can acquire, own, enjoy and alienate property in its own name. No shareholder can make any claim upon the property of the company so long as the company is a going concern. The shareholders are not the owners of the company’s property. The company itself is the true owner.
- Capacity to sue and be sued: To sue means to institute legal proceedings against or to bring a suit in a court of law. Just as one person can bring legal action in his/her own name against another in that person’s name, a company being an independent legal entity can sue and also be sued in its own name.
- Dual Relationship: In the company form of organization it is possible for a company to make a valid and effective contract with any of its members. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, creditor, director and also an employee of the company.
- Borrowing Capacity: A company enjoys better avenues for the borrowing of funds. It can issue debentures, secured as well as unsecured and can also accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to a company rather than partnership firms or proprietary concerns.
Disadvantages of Private Limited Company
- Registration Process – Private limited company registration on average takes about 10 – 20 days. Hence, registering a private limited company involves a process and costs which are not applicable to an unregistered entity like proprietorship. However, once registered, the private limited company enjoys a wide variety of powers and rights, making the process for opening bank account or getting a payment gateway, easy. Proprietorship or partnership firms often encounter difficulty post registration while having to open a bank account or obtain a payment gateway, as they are considered unregistered business entities.
- Compliance Formalities: A private limited company requires a range of compliance post incorporation. All companies are required to hold board meetings, general meetings, get the accounts audited, maintain a statutory register and file an annual return with the Ministry of Corporate Affairs each year. In addition to the corporate compliance formalities, a company would also have to maintain compliance with tax and labor laws, which are applicable irrespective of the type of business entity.
- Division of Ownership: A major disadvantage of a private limited company is that it requires a minimum of two persons to act as Directors and shareholders. So, any sole entrepreneur who wishes to start and operate a business by him/herself cannot start a private limited company, though he may also opt for a One Person Company as well. Hence, any major decision to be taken by a company would always require the consent of two persons. The company would also need to have two shareholders, even if one person holds a negligible amount of shareholding.
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