Benefits and Advantages of Private Limited Company

Private Limited Company is a very old school concept for a privately held small business entity. 

Almost 93 percent of the companies incorporated in India are registered as Private Limited Companies. Don’t you think there must be some “Better than I thought of” kind of benefits why so many people choose Private Limited Company over so many other types of registrations out there.!

If we go characteristics wise, a Private Limited Company is a registered company which limits the liability of the owner to the contribution made by them i.e. only upto the value of shares held by them, it limits the number of shareholders/members to 200 and it restricts shareholders from trading their shares publicly.

But who understands all these technical JARGON..? Not at least when we are just about to start the business..! All we need to know at this stage is Why should I register my business as a Private Limited Company..? Or Why should I incorporate a Private Limited Company..?

Now let me tell you in an understandable language…

One may ask, why should I register a Company, when I can run my business just like that (as a proprietary firm)..???

This is where we can help you understand the POSITIVES of registering your business as a Private Limited Company.

1. Members

There shall be at least 2 members to start a private limited company.

Don’t you think it's always best to have a companion(s) who knows what is going on in your mind? This person may help you add more perspectives to this business idea, help the idea expand - probably in the right direction, may offer you exactly what you lack - place, people, money or smartness! and the much needed, this person could bring in contacts so then certainly you can reach upto people more than in your Contact List - be it for ideas or for FUNDS - you never know!

Now there’s a limit to it. You cannot have more than 200 members. 

But who needs that many..? You certainly don't want this much of chaos in the initial stage. Right! In future, if you feel that the company needs more member, we can do that, but that’s not required at this point...not right now!

Besides, not just an individual, even a body corporate can become a member of the Private Limited Company.

2. Limited Liability

The liability of each member or shareholders is limited to the contribution made by them.

Quite difficult to understand but extremely powerful tool of a Private Limited Company. This can literally turn the table for you!

Let me explain…

When you are a Proprietor you solely reap the benefits, profits and assets of the business and similarly, you are solely responsible for all the losses, debts and liabilities of it. Suppose if you have taken any loan for this business and, God Forbid, but if you fail to repay the loan or any other debts that you have taken for this business, YOU are liable to pay off these debts, irrespective of the performance of the business. In this case, if the assets of the business are not enough, the creditor may also take your personal assets - jewellery, land, any other belongings - to pay off the debt completely. Basically, you end up looted!

Same is the case with a Partnership firm, or may be even worse as in the case of a Partnership firm, you are equally liable for your partner’s actions. Which means, if the other partner takes any loan for the business, you are equally and personally liable to pay off the complete debt. And they don’t even care if you were aware of this loan/debt/credit or not!

Shocking Right!

But, if you have an AIRBAG i.e. register your business as a Private Limited Company, you are safe from these Shocks! 

If a Private Limited company takes any loan and is unable to pay off, the members are responsible to pay only that much how much they own towards their own shareholding i.e. the unpaid share value. Which means, if you have no balance payable towards the amount of shares you hold, you are not payable towards any debt payable by the company even if the debt/credit amount remains unpaid.

Isn’t it great! And certainly, why should you pay for something that you are not responsible for!

3. Perpetual succession

Since a Company is a separate Legal entity, in the eyes of law the company keeps on existing even in the case of death, insolvency or bankruptcy of any of its members. 

Lets understand this. If you have a proprietary business or a partnership business, you and your business are one and the same. There’s no difference. But Registration of company makes your business a different legal entity and with respect to this business, YOU (founder/member/director)  are separate entities. Thus, if you register/incorporate a Company with MCA (Ministry of Corporate Affairs) then your company attains a Separate Legal status. Due to this, the life of the Company is not dependent on the life of its founders or its members. Even if the members, for that matter even all members, become bankrupt/insolvent, the company remains unaffected.  

4. Capital

Whatever amount the founder members deposit from there OWN POCKET is called CAPITAL. It could be the amount that you need to start the business. There’s no minimum or maximum limit onto this but generally, people start their business with capital if Rs.1 lakh reason being earlier, the shareholders had to pay a minimum of ₹ 1 lakh as a subscription amount to incorporate a private limited company. Now, there is no such requirement. So, if your business doesn’t need this much or if you are getting funded from an outside source then you can even choose to keep lesser amount as your capital - Rs.10,000 or even Rs.1000. Just remember - it must be just as much as you are investing in business OUT OF YOUR OWN POCKET. 

Also, it shall be some sensible and justifying amount. There’s no rule or formula to calculate the ratio, but it should make some sense. For example, starting a Biscuit Factory that needs an investment of crores of rupees cannot have a capital of Rs.10/-. 

How does this point counts to be an ADVANTAGE..?

Let me spill the beans…the secret that is not known to a beginner at least!

This Capital that you invest in the company is not an Asset of the company, its a LIABILITY of the Company. And Liability means something that a Company does NOT own and eventually needs to pay off. Thus, if the company chooses to Shut Down in future or goes insolvent, this capital amount will be paid back to you!

Which means, even if the Company is going in mud, it is not taking you down with it, unlike any proprietary or partnership business where you are the one who tastes this mud as badly as the business does or maybe even worse.

So, register your business as a Private Limited Company and save yourself from concealed risks!

 5. Name

Technically this a first point that you focus on while Incorporating a company. The name you select for your business entity is not just a Business name but an Identity of your Company. Thus make sure you choose a Name that is catchy, unique and never heard of. It could be the Brand name by which your business (product or service) will be recognised by many, thus make sure it does not sounds similar to any other business entity or product name.

To know the technicality of getting a Name for your Company, you need to apply for it on MCA website. If they approve the name, this name remains reserved for you for 20 days only. Which means that you are required to register your company within this time span. 

Many fails to understand this and think that if the name is approved, it is available forever. But that’s not true. If you fail to register the company within 20 days from the date of approval of the name, this name expires and is no longer reserved for you. Any other person if applies for the same name after it is expired for your case, the other person may get the same name, and you cannot do anything for this.

Just so you know, it is not necessary that the name of your company and the name of your products shall be the same. You can always choose different names for different products which your company has.

You can have several trademarks registered for several products/services that your company has. But remember, Trademark is different and Name with which the company is registered is different, thus it can never happen that once you have trademark of some name e.g. ABCXYZ, then you can make it ABCXYZ Private Limited. To add Private Limited to the name, you need to register a company, not Trademark. It's the same vice versa. If the name is registered as ABCXYZ Private Limited, it cannot be considered as a registered Trademark. If you also want Trademark of the same name, you need to apply for it to separate government authority that governs these Intellectual Properties - Trademark, Copyright, etc.

6. Separation between Management and Ownership

A private limited company separates Management and Ownership and thus, managers are responsible for the company’s success and are also answerable for the company’s loss. 

If you find anyone more capable to handle the business, you can always appoint such person as a Director who shall be involved and responsible for the growth of the company and shall also be responsible for the profits you earn as a Shareholder of the company.

Now, try comparing it with LLP.

In an LLP if a situation comes where you find a person more capable to handle the task and so you appoint an expert as an employee, his participation would not be that of a Partner’s involvement, but simply as that of an employee. But if you want him to be a partner in your firm so that his involvement enhance, he gets right to be involved in all the other matters as well, whether you like it or not.

Thus, for such situations, Private Limited company is more advantageous.