WHEN TO CONSIDER REGISTERING A PRIVATE LIMITED COMPANY
Firstly, understand that, it is NOT at all mandatory to register a Private Limited. Company for starting a business in India. There are many other ways to start a business. So, consider the below points before deciding to choose the Private Limited Company as your choice of entity to do business.
Opt for a Private Limited Company only:
- If you are planning to get investments or funding from Angel, Seed or Venture Capital Investors
- If you want to Limit your Liability
- If you have or are considering Expansion Plans for your business
- If you are considering for Employee Stock Options or ESOPs
- When you need a separate “Legal Identity” for your business
- Where you don’t want to use your personal assets as collateral
Note: Do not get carried away by several online low-cost offers for registration of a company. Private Limited Company form is not a one-time-affair. There is a significant recurring costs involved and several Legal Compliances need to be fulfilled regularly (regular Board Meetings, AGM, Compulsory Audit, RoC filing, etc). Failing / delay to meet the legal compliances will attract additional penalty.
Company is an artificial person created under law. This unique feature distinguishes Company from that of all the other business entities. Once the incorporation certificate is given by the Registrar of Companies (ROC) then it means that Company is brought into existence. A Company is different from its members which is another unique feature of the Company which is not the case in that of a sole proprietorship or partnership firm.
Private Limited Company is the most popular type of business entity in India. Entrepreneurs register a company in India to create a business that is well regarded by customers, suppliers, bankers and the Government. By setting up a company, an Entrepreneur has the ability to create a small or large business that can easily raise capital and scale seamlessly to any size.
The ownership of a company is represented by shares. Thus, the ownership of a company can be shared or transferred to any other Indian or Foreign legal entity or person. The directors of a company are also easily replaceable. Hence, on a company allows an Entrepreneur to easily raise capital and transfer ownership without any hassles.
A private limited company provides limited liability protection to its shareholders. In case of any unforeseen losses, statutory or legal liabilities, the shareholders of the company will not be held responsible. Only the Directors of a private limited company are held responsible in most instances for various statutory liabilities.
Private limited company to have minimum 2 and maximum of 200 members, and minimum 2 directors and maximum of 15 directors, the company can appoint more directors by passing the special resolution in its general meeting. Any person can be both either Director or shareholder in a Company.
Types of Private Limited Company
- Company Limited by Shares: The shareholder’s liability is capped at the amount paid up on shares.
- Company Limited by guarantee: The shareholder’s liability is capped at the amount agreed to be committed by the shareholders to the company.
Benefits of a Private Limited Company
- Separate Legal Entity: As per Law, a company is an artificial judicial person established under the Companies Act. A company is a separate legal entity from its Directors and Shareholders. Hence, a company enjoys a wider legal capacity, to own property and incur debts – while the individual company members owe no liability towards the company’s creditors for debts.
- Perpetual Succession: Perpetual succession means continuing or enduring forever., A company is considered to be legally active until it is wound up by its members through a legal process. Hence, perpetual succession denotes continuous existence of a corporation or company till it is dissolved legally. Thus, a company is unaffected by death or departure of any member.
- Limited Liability: Limited liability is a legal responsibility towards a limited amount of debts. The liability of the members with reference to company’s debts are limited i.e.; limited to the face value of the share purchased by them. This limited liability protection is often not afforded to Directors of a company – who are held responsible for operation of a company.
- Transferability of Shares: The ownership of a private limited company is determined by the number of shares held by its shareholders. Shares of a company can be transferred to any other person or legal entity in India or abroad, subject to the articles of association of a company. The easy transferability of shares is one of the top reason, Entrepreneurs opt to register a company.
- Owning Assets: A company can acquire, own, transfer any type of tangible or intangible asset in India. A shareholder is not eligible to claim the company’s property, as they are not owners of the company. A shareholder merely has an interest in the company arising under the articles of association of the company, measuring a sum for liability.
- Equity Raising: A company is the only type of legal entity which can help the promoters raise equity funding from Angel Investors, Private Equity Firms and the Stock Exchange. A private limited company would suffice for raising equity funds from Angel Investors and Private Equity Investors. In case of listing or allotment of shares to more than 200 shareholders, a Limited Company would be required.