Top 10 Reasons to Form a Private Ltd Company Even If You Have Just Started Business
The first question that comes to the mind of an entrepreneur while setting up their dream project is about the business entity. This is an important factor in a new company formation and is sure to have long-term implications throughout the life-cycle of the business. The company’s entity must reflect its vision and so one must ensure that professional help is sought before making a decision on the entity at the time of business registration.
What is a Private Ltd Company?
It refers to a privately held business which has certain limitations on the owner’s liability on the shares, limitations on the number of shareholders (50 or less), and prohibits open trade of these shares by the shareholders.
Some might point out that a private limited company will involve a lot of administrative work and tends to incur more costs than the less complicated sole trader entity. Then why should a start-up prefer a private Ltd entity over the latter? The most predominant answer is the financial liability. A private Ltd company does not put the entrepreneur at the risk of personal bankruptcy in the event of business failure. There are many more benefits of registering a company as a private Ltd. Read ahead to understand about the other benefits. There are three kinds of members involved in such companies- members limited by ownership, members limited by shares (shareholders), and the members limited by guarantee (guarantors).
Benefits of a Private Ltd Company
This is a big advantage of a private Ltd company. Having a limited or capped liability would ensure that the shareholders and members do not have to take the complete burden of debts in case the business meets with huge financial losses. The assets and finances of the shareholders thus remain protected beyond their shareholding value. In extreme cases of a financial bankruptcy of the company, the shareholders need to only contribute the nominal value of their shares. Having this security allows the company to provide high-value services which might otherwise lead to liability claims.
A private Ltd company creates a professional image and boosts the business value. They are viewed as more established and credible over the sole traders. Also, this entity provides a sense of security to the investors and professionals choosing to use the business’ services. It also suggests business permanence. A private Ltd company opens up business opportunities with larger companies which will otherwise not be available. Registering a company as a private Ltd ensures brand uniqueness and also eliminates duplication in the market.
3) Tax Saving
It is a known fact that corporation tax rates are lower than the income tax rates. Registration of company as private limited enables the new company to save a significant amount on the taxes. Apart from the usual salary, the company can also choose to pay dividends to its shareholders. The dividends have lesser tax deductions when compared to the salary and hence is of higher benefit to the shareholders. It also gives scope for the employees to get pension contributions from the employers. The company can make tax relaxable contribution towards employee pension fund which will be a tax deductible expense for the company.
4) Attract Better Talent Pool
This is a perspective which is not analysed much. In today’s competitive market, it is essential for a company to retain its high performing talent pool. To do so, businesses are offering a number of benefits like stock ownerships or ESOPs. This is highly valued benefits among the prospective hires and employees. This is only possible in case of a private Ltd company as only they can offer ESPO plans or stock ownerships to their employees.
5) Pursuing Opportunities
Registering a company as a private Ltd ensures that the business is not tied to its promoter and is a separate legal entity. This means that the promoter can pursue different opportunities as and when the business evolves. A sole trader or a partnership company does not have this freedom as it is attached to its promoter and does not have its own entity. Hence, registration of company as a private Ltd would result in quick growth and an ability to independently pursue various opportunities in the market, thus having an edge over the competitors.
6) Going Global
Business registration as private Ltd entity allows foreign companies and investors to invest in their company without any government approval. This makes it easier for the business to go global when compared to its counterparts (sole proprietorships and partnership firms). With increased competitors Indian startups aspiring to compete on a global scale, it is crucial for a new business to have this feature to allow FDI and collaborations with foreign businesses.
7) Improving Business Credibility
With lots of new businesses and ventures entering the market every day, customers, investors and suppliers are looking for business credibility. While in India, a proprietorship or partnership firm is not registered with the Ministry of Corporate Affairs and thus can’t be traced in the LLP databases. This results in no credible proof the existence of a company thus making it difficult to get basic requirements like opening a bank account. By a private Ltd registration, the business makes information like name, registered address, incorporation date, company status, and other related data searchable and easily available for investors and customers in public databases. This improves business credibility and makes it easy to authenticate the business to its vendors, customers, and investors.
8) Easy Funding
For any startup, funding is a very crucial aspect of establishing, maintaining and growing a business. For a business to grow quickly, it needs to have all types of funding which can be made available. A proprietorship or partnership firm limits its funding to self-funding, debts, and funding by family and investors. It can’t enjoy the facility of equity funding through the issuance of shares. This could prove to be a setback for a startup as it is losing on the main source of risk-free funding. A private Ltd registration can ensure that the business is able to utilise this funding option as well, along with the others.
9) Separate Legal Entity
A private limited company has its own separate entity. It is not tied to its founder. All contracts and formal documents will be linked with the company and not its founders or shareholders. The company will not cease to exist with the demise or change of directors and shareholders over time and can only be formally dissolved, liquidated or, in some cases, ordered by the Registrar of Companies. A private Ltd registration gives a sense of security to employees. Also, the company set up need not show any significant financial transactions to prove its existence. This is very beneficial for small startups with insufficient funds or time to develop the business completely.
10) Exit Strategy
Registration of company as a private Ltd gives scope to the promoter to sell it in the future. The owner can get a clean break and distance himself effectively from the business and also receive monetary benefits out of it which can be a financial aid for the next venture. The owner can also avail the Entrepreneurs’ relief against capital gains tax in such cases. This is not this easy to achieve in cases of the other business structures.
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