You might be wondering why startups mostly choose a Private Limited Company in India?
Startup companies are growing enormously each passing day in India. Startups, in fact, play an important role in the country’s economic growth in developing countries like India. They create an innovative platform for aspiring entrepreneurs to create jobs, new products, dreams, and disruption.
In the initial stages, entrepreneurs may be uninformed about what is setting new business because many of them are not aware of the basic legalities of how to start and register a company. It is very important to be on the right side of the law.
But as a new entrepreneur, you might be wondering which type of company suits your business?
To start a new venture as a solo entrepreneur or as a group, a One Person Company or a Private Limited Company is the right choice of company for your business to limit liabilities and create a perpetual succession of a business.
Let’s take a look at Private Limited Company today.
A private limited company is a privately held business in which the owner is limited to shares with a minimum of 2 shareholders or promoters. Keep in mind, promoters are the Directors appointed in the company. When we look at the requirements, a private limited company requires a minimum of two 2 members and a maximum of 200. The least paid-up capital to establish this type of company is 1 lakh.
There are several reasons why startups choose a private limited company.
Separate Legal Entity: A private limited company is a body that exists separately between the owner and distinct from its members and directors. Hence, a Private limited company is a separate legal entity from that of its members in a company.
Uninterrupted existence: Private limited companies are perpetual, which is continuous or uninterrupted existence of organization until it is legally dissolved. So the company is unaffected by the death of any of its owners or the transfer of its shares to the new entity. Perpetual succession is one of the unique characteristics of a private limited company. An important thing to note is, a private company can be forced to close if the Ministry of Corporate Affairs compliance is not met.
Limited Liability: Each business partner is provisioned with limited responsibility which means they are not completely responsible for the business debts or accountabilities. So each partner is liable for their actions. One of the major advantages of having a private limited company is that the liability of the shareholders is limited to their shares or the amount of their investment only. If the private limited company is facing any financial crisis and has to close, the shareholders will not risk losing their personal assets as a company separates its assets and liabilities from the shareholders.
Further issue of capital: In private limited company issuing of shares is confined to its existing members of the company with a limit of 200 members whereas in a public limited company shares are issued to the outsiders or the general public.
Taxation: Companies like the private limited company are taxed at a lower rate and provide better taxable benefits compared to other types of companies. India may not have the corporate structure in the world but it is the most opted legal entity within India.
Raising funds: Raising funds in a private limited company can be done through selling shares to its investors. Therefore startups opt for private limited companies as a type of business entity.
In conclusion, new companies or startups seeking investments and considering limiting their liabilities would preferably opt for Private Limited Company.
The Ministry of Corporate Act’s governing law gives many advantages outweighing the disadvantages although, considering the costs, the biggest disadvantage is the strict compliance private limited companies require to adhere, which can be expensive for startups.