Private Limited Company is a kind of body corporates which are the most preferred entity in India. Most entrepreneurs choose this kind of corporation for their businesses. This is because of the various benefits they offer to the businesses. It is a kind of entity which has been incorporated under the Companies Act of 2013. It is an artificial or juristic person having a separate legal entity. There are certain things which are associated with this kind of entity like compliances, accounting and bookkeeping, daily operation, management etc which one needs to take care of. It is a general rule that everything has its two aspects, positive and negative. Similarly advantages and disadvantages of private limited company are the two aspects of this type of entity. If you are thinking about choosing a private limited company for your business you must read this blog. This will give you an idea about both advantages and disadvantages of private limited company.
What is a Private Limited Company?
Private Limited Company is the kind of company which has been incorporated under the company law. It is an artificial or juristic person which is incorporated or formed by the law. It is having a separate entity with a perpetual succession and common seal. It is an invisible intangible existing only in contemplation of law. It is a mere creation of law. It possesses only the properties which the charter of its creation confers upon it. It can be conferred either expressly or as incidental to its very existence.
Important Aspects of Private Limited Companies
Some of the very important things which you must know before going deep into the disadvantages of private limited company are mentioned below:
- It is incorporated online through the MCA by submitting application before the ROC
- For the incorporation of the private limited company it is compulsory to have at least two minimums. Maximum this number can go up to 200 members
- Separate legal identity is another good thing about such kind of entities
- Private Limited Companies are not associated with its members
- Govern by the law called Companies Act of 2013
- They are liable for their own acts
- The liability of Private Limited Company is distinct from its members
- There is no agent principal relationship between the members of the companies and the company itself
- Directors manages the Private Limited Company
- They are having perpetual succession
- Powers of the Private Limited Companies lies in the objective clause of the company
- Companies can be dissolved after following the proper procedure.
- Legal and financial compliances of the corporate bodies must be fulfilled in order to save oneself from fines
Key Disadvantages of Private Limited Company
Some of the key disadvantages of Private Limited Company are given below specially for the reference of those who are thinking about to enter into the business world:
Incorporation Formalities
Private Limited Company is the body corporate which has been formed after following the due procedure of law. The due procedure of a law involves various steps. Even if you miss one single step your application may be rejected or clarification may be raised. This is a complicated process not easy to complete by a layman. It requires a professional to complete it. All this makes it a little bit hectic for the business owners to incorporate a private limited company.
Incorporation Cost
As mentioned in the above point, the process of incorporating private limited companies is a little bit complicated. Hence it requires professionals to complete the process and these professionals charge for the same purpose. Also this process needs to prepare various documentation like DSC, DIN, MOA, AOA etc. They have their separate costs associated with them. After completing the application, during the time of submitting it one needs to pay the Company registration fees as well. The registration fees may vary state to state. But it is compulsory in all the states. All these expenses make it a little bit costly to incorporate a private limited company. Hence it is said that private limited companies should be made after proper research.
Complicated and Costly Compliances
Complicated and costly compliances are another aspect of private limited companies. Mostly people incorporate private limited companies but they don’t even have an idea about the compliances of the company. They think that their company got incorporated, it just works like the partnership or proprietorship firms. But unfortunately it’s not like that. In private limited companies there are both post and pre-compliances. One needs to complete these compliances in order to save their business from heavy penalties. There are separate government fees for filing of every compliance form. Some of the common compliance in a private limited company are INC-20, MGT-7, ADT-1, AOC-4 etc.
Can Not Becomes Citizen
Although a private limited company is a legal person, it does not have citizenship rights. It is considered as one of the disadvantages of private limited company. It is not allowed to become a citizen of India either under the constitution of India or under the Citizenship Act. This was held in the very famous case of the honorable Supreme Court, that is State Trading Corporation of India Ltd v/s. CTO. Companies however are a person in the eyes of law and can claim the protection of such fundamental rights as guaranteed to all whether they are citizens or not. But it cannot claim the protection of such fundamental rights which are expressly guaranteed to the citizens only.
Incorporation of Subsidiaries
Incorporation of subsidiaries is one of the worst disadvantages of private limited company. If a private limited company forms a subsidiary company and holds 100% shares in the same then it is not allowed. Because as per the law if the 100% shares are held by the holding company in its subsidiary company then it will be assumed that it has been made with some ill intention. And in such conditions the corporate veil will be lifted and proper inspection will be done by the competent authorities.
Prevention of Fraud
When a company’s platform has been utilized to commit fraud or other wrongdoing, then courts have the right to lift the corporate veil. And look at the realities of the situation. If it is found that the main motto of the company is just to do fraud or to do improper conduct then it will not allow the incorporation of such a company. There is a famous case regarding the same that is Gilford Motor Company V/S. Horne. In this instance, it was determined that the firm’s formation was just a cover or ruse to allow the defendant to breach his contract with the plaintiff because he in fact controlled the company. An injunction was consequently imposed against both him and the corporation.
Conclusion
While Private Limited Companies offer numerous advantages, there are also some notable disadvantages of private limited company. The disadvantages of private limited company includes complex formalities and significant costs, often necessitating professional assistance. Moreover, the stringent legal and financial compliances can be complicated and expensive, and the company does not enjoy citizenship rights. Additionally, the law prohibits certain ill-intentioned actions, with the risk of the corporate veil being lifted to prevent fraudulent conduct. Therefore, potential business owners must carefully weigh these pros and cons when considering the formation of a Private Limited Company, as it is a decision that requires thorough research and understanding of legal obligations and responsibilities.
