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All you need to do know before choosing Private Limited Company as a form of your business

A lot of aspiring entrepreneurs end up starting their business as a Private Limited Company without knowing the whereabouts. Before choosing PLC as a form of business, one must know its features, benefits, limitations & compliances, which are briefly described below

Introduction

Private limited company is the most popular corporate entity amongst small, medium and large businesses in India.

Features of a Private Limited company

  • It should have a minimum of 2 members and can have up to 200 members
  • No minimum capital is required to start it.
  • It has minimum 2 directors

Factors to be considered

Benefits of a Private Limited Company

  • Separate Legal existence: A private limited company will be a separate person in the eyes of law, i.e. its members and “the company” will both enjoy individual existence different from one another.
  • Limited Liability: With separate legal existence, comes this very important benefit. Unlike the sole proprietorship and partnership firms, where the owners have an unlimited liability, the liability of the company is different from its members. Liability for repayment of debts and lawsuits incurred by the Company, lies on it and not the owner.
  • Assurance and credibility in the eyes of consumers: Think from the perspective of a consumer and you will always have more trust on entities registered as a “private limited company”, than entities working under the forms of sole proprietorship and partnerships.
  • Easy to raise funds: Raising money as a small business such as a sole proprietorship or partnership can be difficult as you cannot add larger members to your business which is not the case with private limited company as it can have up to 200 members. Moreover, since the companies are governed by the companies act and they must be compliant, they generally enjoy good credit worthiness with various financial institutions.
  • More flexible than a public limited company: A company registered as a private limited company would have lesser compliances than a public limited company. 
  • Perpetual succession: A Private limited company continues to exist even if its members dies or cease to exist, similarly changes in the management does not bring a change to its identity.

Limitations of a Private Limited Company

  • Restriction on issue of shares: Unlike a Public limited company, which can issue its shares to public, a private limited company must restrict its shares to its members. Also, there are restrictions on transfer of shares
  • Cannot accept public deposits: A private limited company cannot accept deposits from the public and it can take loans only from shareholders, directors and relatives of directors.
  • Less flexible than partnerships and proprietorships: A sole proprietorship or a partnership or a LLP will always have lesser compliances to meet than a private limited company.

Compliances to be met

Here is the list of some general compliances under various laws which a private limited company must meet

Under Companies Act

  • Filing of annual return (MGT 7): within 60 days of holding the AGM (Annual general Meeting)
  • Filing of financial statements (AOC-4): within 30 days of holding the AGM (Annual general Meeting)
  • Allotment of securities: Each subscriber to memorandum of association should deposit the subscription money for shares and company should deliver certificates of all securities allotted within 2 months from incorporation.
  • Appointment of statutory auditor: within 30 days of incorporation
  • Statutory Audit of accounts: to be conducted by the appointed statutory auditors

Under Income Tax

  • Calculation and Quarterly Payment of Advance Tax
  • Filing of Income Tax Returns
  • Tax Audit & Filing of Tax Audit Report – Mandatory in case sales, turnover or gross receipts of a business exceed Rs. One Crore in the previous year relevant to the assessment year.

(The author is a CA in practice at Delhi and can be contacted at: E-mail: abhinandansethia90@gmail.com, Mobile: +91-9811741451)

Categories: Company Law
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