Looking for a start up having long term well grounded business plan?
Looking to give a Corporate Identity to your business?
Looking for creation of an Artificial Juridical Person?
Here now, you can stop thinking and get a solution for above queries by forming a Private Limited Company. Many entrepreneurs are in dilemma that which type of business entity they should give for their business whether a proprietorship (in case of a one person) or a partnership (in case of more than one person) or a Company.
Forming a Company for a business model having long Term Goals is always a good idea in terms of funding, to get many benefits from the government, to get good marking materials, to get the tenders and deals on priority basis etc.
Private Limited Company is most popular type of Company in India. There are many reasons behind the popularity of the registration of Private Limited Company but the ease of operating a Private Limited Company is most common reason behind the popularity of Private Limited Company. Government of India is also coming with the idea of Compliance friendly environment for the Companies and ease of doing business.
This article is aimed to give a general idea about the formation of Private Limited Company to the entrepreneurs rather to give technical knowledge in detail. (Technical Compliance can always be consulted by me but it is more important to know the basics of Private Company).
1. What is Private Limited Company?
Private Limited Company is an artificial person created by law. Any two or more persons desirous of setting up a business venture can form a Private Limited Company even with Rs. 2 sum of Capital. A Private Company may have 50 persons as its shareholders (Owners) with minimum of 2 shareholders and the minimum Directors shall be 2 which shall not exceed 15 at any time.
In India, the number of proprietorship concerns may be more than the number of Corporate Bodies but in terms of revenue generation, the Corporate Bodies always prevails over proprietorship. It is wrong to say that a Private Company is for small businesses only. One can operate big business with a Private Company for eg. Flipkart, Ola, Snapdeal, etc.
2. Why to form a Private Limited Company (advantages of forming Private Limited Company)?
There are many reasons to form a Private Limited Company; however we will hereby understand some practical reasons:
a. More than Proprietorship but less than Public Company
Private Company is nothing but extended form of partnership firm / proprietorship business. The position of a Private Company in terms of recognition, compliance and expenses is more than a proprietorship business but less than a Public Company.
We can see proprietorship businesses having turnover in crores and operating all around the India but all point of time a proprietor may not enter into a new market or deal with other business entity because it has a proprietorship concern even after having a sound turnover records.
The market and the situations may require the person to get register its business entity as a Private Limited Company which is also an economical idea. So, the formation of a Private Company is a good idea for a businessman who wants to form a more recognized legal entity.
There is no minimum requirement of amount which is required to be invested in a Private Company as a Capital. The promoters of a Company may choose the capital structure of the Company in view of the business plan, requirement of equity funding and others.
As we can see many of the startups does not have money in the initial phase and their business plan is supported by and depends on the grants/subsidies to be provided by the government. A Private Limited Company gets preference over a proprietorship concern.
Also, to get eligible for many government grants/subsidies, the government schemes may require a business to be form atleast as a Private Limited Company and the proprietorship business may not be eligible for that schemes.
The Company is an artificial person. And yes, the Company, its Directors and its shareholders are different persons in the eyes of law. This is called as Separate Legal Entity.
It can be said that the Directors are the trustees of the Company and their main duty is to manage the affairs of the Company. So the Directors and shareholders (Owners) can be different persons. The assets and liabilities of the Company are different from the assets and liabilities of the Directors.
The shareholders (owners) of the Company shall not be responsible of any liability of the Company.
For example if a Private Limited Company is unable to pay any loan taken by the Company itself, then shareholder shall be liable to the extent of their unpaid value of shareholding which is unpaid value of shares taken. So, if the shareholders do not have any unpaid shareholding then they will not be liable to pay any debt.
A Private Limited Company always enjoys the preference over the proprietorship in terms of raising of funds from the public and private institution. The lending institution always prefers Private Limited Companies for granting loans and to give other facilities.
Also, through the Private Limited Company, we can raise funds from the Venture Capitalists or Angel investors.
The Private Company is more reliable over the Proprietorship in terms of verification of its data. The data of Private Company is always available on public domain. This makes the Private Company more reliable.
g. Start Up Recognition
If the business plan of your proposed Private Limited Company is toward innovation, improvement of existing product, services, processes and if the startup have potential to generate employment/ create wealth, then your start up can be recognized by the Department for Promoting of industry and Internal Trade (DPIIT).
Followings are the few benefits of startup recognition:
i. Startups are provided an 80% rebate in filing of patents vis-a-vis other companies bringing down the cost from INR 8,000 to INR 1,600. This helps them cut down on costs in their early years. 50% rebate is also provided in filing of Trademarks vis-a-vis other companies decreasing the cost from INR 10,000 to INR 5,000.
ii. The patent application of Startups is fast-tracked for examination and disposal. The process is much faster for recognized Startups.
iii. Ministry of Corporate Affairs has notified Startups as ‘fast track firms’ enabling them to wind up operations within 90 days vis-a-vis 180 days for other companies.
iv. The recognized Startups that are granted an Inter-Ministerial Board Certificate are exempted from income-tax for a period of 3 consecutive years in initial years.
Disclaimer: The contents of this article are for information purposes only and do not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.
(You may contact the author for any query/suggestion at +91-8720075236 or [email protected])