Private Limited Company Registration in India- Pros and Cons
There are many options for setting up business in India like proprietorship firms, partnership firms, Limited Liability Partnerships, Private limited companies, Public limited companies, and one-person companies. All these setups require private limited company registration in India for legal purposes. Also, persons interested in philanthropy or social welfare may opt for NGO registration in form of either opening of trusts, registration of the society, or registration of section 8 companies.
Each of the above types of entities has their own pros and cons and one need to choose between the type of entity on basis of its nature of business, long term vision, tax benefits, scalability of the business and other factors.
Private limited company registration is one of the best options for businessmen involved in commercial activities and who have long-term vision of expansion and growth.
In this write-up, we would be discussing various pros and cons of Private limited company registration in India.
Pros of Private Limited Company Registration:
Suitable for Start-up Company Registration in India
A private limited company is one of the pre-requisites for getting registered under the Start-up Indian scheme i.e. for startup registration in India which allows new startups to avail a number of benefits from banks, financial institutions, and other vendors.
2. Suitable for equity financing
Shares of a private limited company are freely transferrable. Accordingly, it can arrange equity funding from venture capital firms and private equity firms, and investors.
3. Limited liability of members
When any unforeseen financial crisis occurs and the company is about to close, shareholders are liable only up to the number of shares held by them. They are not require to give their personal assets like home, properties or savings, In partnership, partners are personally liable for debts, in case business fails to repay its Debt; partners have to sell their personal assets. However, in case of Private Limited Company, the only amount invested by shareholder will get lost in case of winding up of company due to financial crisis. This is one of the reasons why it is preferred mode of company incorporation in India.
4. Access to Equity funding
Private limited companies can easily get equity funding from Angel investors, venture capitalist and private investors in exchange of shares of the company. This is another reason for popularity of private limited company over other entities like LLPs and Partnership firms.
5. Lower Tax Rate
Private Limited companies are taxed at Lower rate of 22%/25% plus surcharge and education cess.as compared to LLP and Partnership Firms which are taxed at 30% plus surcharge and education cess.
6. Suitable for subsidiary company registration in India
It is a suitable to form of entity for foreign companies which want to hold majority shares in Indian company. Foreign companies prefer to opt for subsidiary company registration in India out of various options available since it is tax efficient and have many advantages.
7. Borrowing capacity
Compare to any other forms of business, a private limited company has more option to borrow funds on debt, as private companies can borrow fund not only by way of loan from bank, but also by way of issuing debentures and convertible debentures.
8. Easy to do changes
Since the entire process is online. It is quite easy to make changes in private limited company like change of address, change of objects, Easy to Add and Remove Directors and Shareholders etc.
9. Brand and Reputation
It has Brand or Reputation as compared to Proprietorship or Partnership Firms.
10. Greater credibility
Since Private limited companies are subject to yearly audits and required to file numerous numbers of documents with registrar of companies, so lot of information about their structure, operation and financial remains in public domain. Information about authorised capital of the company, names of directors, registered office etc. are easily available. This information makes business more credible than other forms of business.
11. Better governance
Since private limited companies are governed by Ministry of Corporate Affairs (MCA) and is regulated by companies’ Act 2013, so, they are required to follow procedures and norms to comply with rules and regulations prescribed which create more values to owners.
12. Online Registration for entire India
Private limited company registration can be done for entire India sitting at comfort of home. This is the biggest advantage.
Thus, all the aforesaid reasons make the Private Limited Company Registration as the most popular and preferable mode of company incorporation in India.
Shortcomings or Disadvantages of Private Limited Company Registration
Private limited company registration has the following shortcomings or disadvantages:
- Compliance costs of Private limited companies are more as compared to LLPs or Partnership firms. This is one of the reasons for small companies not to opt for this option of company formation in India since they don’t want to bear the excessive cost of compliance.
- Winding up or closure of a private limited company is a complex procedure especially when a company has huge assets and has accumulated profits and losses.
Thus, it may be seen that private limited company registration also has some disadvantages; however, since the number of benefits far exceeds the shortcomings or disadvantages, therefore, this is a preferred mode of company registration in India.