Private Limited Companies: Advantages and Drawbacks
One of the issues that frequently comes up when thinking about launching a business is whether or not to form a Private Limited Company. It’s critical to comprehend the benefits and drawbacks of this form of corporate structure.
A Private Limited Company is what?
A Private Limited Company is a formally established organization that provides its stockholders with limited responsibility and legal protection. It does, however, place some limitations on ownership.
Private limited companies are often ideal for small firms and are privately held. Members’ responsibility is restricted to the quantity of shares they own. A Private Limited Company’s shares cannot be exchanged publicly.
This is one of the most popular types of business registration in India because it is simple to set one up. To register a Pvt Ltd company, a minimum of two people are needed. The capacity to raise equity money, recognition as a separate business entity, and limited liability protection for shareholders are some of this form of business structure’s main advantages. These features make it an ideal choice for numerous small and medium-sized businesses that are family-owned or professionally managed.
Minimum Requirement for Private Limited Company
A Private Limited Company must have a minimum of two adults as directors. The other director(s) may be foreign nationals, but at least one of the directors must be an Indian citizen and resident. A minimum of two shareholders, who might be either natural people or artificial legal entities, are also required for the corporation.
Registration Process of a Private Limited Company
With the launch of the SPICe+ (SPICe Plus) web form, the registration process for a Private Limited Company in India has become even more practical. It replaces the earlier SPICe form and enables the submission of a single application for the creation of a bank account, name reservation, incorporation, DIN allocation, and the mandatory issuance of PAN, TAN, EPFO, and ESIC. It also provides for the mandatory issuance of the profession tax (Maharashtra).
SPICe+ is divided into two parts:
1. Part A: In this area, you can concurrently submit a name reservation application and a company registration application.
2. Part B: In Part B of the Form Spice+, apply for the following services:
- Incorporation
- DIN(Director’s Identification Number) allotment
- Mandatory issue of PAN
- Compulsory issue of TAN
- Issue of EPFO registration
- Mandatory issue of ESIC registration
- Issue of Profession Tax Registration(Maharashtra)
- Mandatory Opening of Bank Account for the Company and
- Allotment of GSTIN (if so applied for)
Advantages of Private Limited Company
1. No Minimum Capital Requirement: A Private Limited Company can be established with just Rs. 10,000 in minimum authorized share capital, negating the requirement for a substantial initial outlay.
2. Separate Legal Entity: Because a Private Limited Company is regarded as a separate legal entity, its assets and liabilities are kept separate from those of its directors. Because of this division between management and ownership, managers are responsible for both the company’s profits and losses.
3. Limited Liability: Members’ private assets are safeguarded in the event that the firm experiences financial difficulties. Only the unpaid value of the shares is the only debt owed by shareholders. As a result, shareholders are not individually liable for any debts of the firm that go beyond the value of their shares.
4. Fundraising: Private Limited Companies, along with Public Limited Companies, have the advantage of being able to raise funds from venture capitalists and angel investors, making it easier to secure necessary capital.
5. Transfer of Shares: Shares of a Private Limited Company can be easily transferred from one shareholder to another, unlike interests in a proprietary concern or a partnership. This can be done by filing and signing a share transfer form and providing the buyer with a share certificate.
6. Uninterrupted Existence: A Private Limited Company enjoys perpetual succession, meaning it continues to exist until it is legally dissolved. The company remains unaffected by changes in membership, such as the death or departure of a member.
7. Foreign Direct Investment (FDI) Is Permitted: A Private Limited Company allows 100% FDI, allowing foreign organizations or people to invest directly in the business.
8. Increases reputation: By giving information that is simple to verify, the company’s information is readily available on a public database, increasing its reputation.
Disadvantages of Private Limited Company
1. Restricted Share Transferability: One significant drawback of a Private Limited Company is that its articles restrict the transferability of shares.
2. The maximum number of shareholders for a Private Limited Company is 50.
3. Private Limited Companies are not permitted to provide a prospectus to the general public.
4. Lack of Stock Exchange Listing: A Private Limited Company’s shares are not permitted to be quoted on a stock exchange.
Conclusion
A Private restricted Company provides a number of advantages, including restricted liability, simplicity in acquiring capital, and position as a distinct legal organization. However, it also has several limits, such as the inability to publish a prospectus or list shares on a stock exchange, as well as prohibitions on share transferability. Therefore, before choosing this business structure, it is essential to carefully balance the positives and negatives.
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