A company that is owned and run by a small group of people is a private limited company. Such entities are controlled by private interests, unlike an LLP or a sole proprietorship, a private limited. The company’s liability arrangement is less strict, protecting company assets from loss in the case of a financial crisis.
There is one exception to the rule that all partners in a private limited. The corporation is liable for the company’s loss. Shareholders may incur such losses up to the number of shares they own. A member’s obligation to make up for a company loss is restricted to the number of shares they possess.
Kinds of Private Limited Company
Private Limited Companies can be classified into the following heads
1. Company Limited by Shares
The nominal share value specified in the Memorandum of Association serves as the members’ liability cap in these corporations. A shareholder cannot be made accountable for more than the value of the shares they purchased from the corporation.
2. Company Limited by Guarantee
The amount of liability that each member assumes in the Memorandum of Association governs the members’ liability in a private limited company limited by guarantee. As a result, a Private Limited Company Limited by Guarantee’s members are only responsible for the amount of guarantee they provided in the Association Memorandum.
Additionally, in a corporation limited by guarantee, the shareholder’s guarantee may only be requested in the event of a corporate wind-up. When a Company Limited by Guarantee is still operating, the members’ guarantee cannot be revoked.
What attributes are found in Private Limited Companies?
The following features follow in the case of private limited companies:
Limited Liability Organisation
In a private limited corporation, the accountability of each member or shareholder is constrained. Therefore, even if there is a loss, the shareholders must sell their own property to pay off the debt. On the other hand, the stockholders’ private and individual assets are not at danger.
Capital Minimum Paid-Up
An Indian private limited corporation must have a minimum paid-up capital of INR 1 lakh. Given that MCA occasionally prescribes, it might potentially increase.
Membership
Like any other business, a firm must have at least two shareholders in order to be formed. The maximum membership limit is 200 due to the organization’s current size. However, at least two directors are required to keep the business running.
Distinct legal entity
This is a distinct legal person that will always exist. This means that even if all of the members pass away or the business becomes insolvent or bankrupt, the corporation will still be recognised by the law as an entity. The company’s existence will be unaffected by the lives of its shareholders or members unless terminated by resolution and will last forever.
Why is a private limited company a better option for start-ups?
Opting to constitute a private limited Co. naturally entails the following advantages for new entities and start-ups:
Minimal liability
Your company will have its own legal identity. This implies that you won’t be held personally responsible, either financially or legally, if something goes wrong, such as if you’re sued or can’t pay your debts. Since the debt is connected to the business, all of your personal belongings, including your home, car, and savings, will be protected.
Splitting the work
You’ll be able to draw on the knowledge and abilities of many more individuals, which will help you maintain your business-focused perspective. Making your company a limited company also makes operating it less personal because you can more readily delegate responsibility to others.
Income benefits
You will discover that there are tax advantages in addition to lowering your personal liabilities. You may avoid paying higher income tax rates yourself if the corporation pays Corporation Tax on taxable profits. If the business is profitable, you can pay yourself dividends instead of paying income tax, which has a higher tax rate.
Structure for Flexible Management
For sole proprietors or small firms without the resources to form a public limited company, private limited companies are well-known. Companies that desire to preserve control of their operations in the hands of a limited group of people may find this to be useful. Private limited corporations provide the owners total authority over running the company. This enables shareholders to oversee the business through a board of directors that is legally recognised and to form committees as needed.
Protection Against Creditors
An important advantage of a private limited corporation is that it provides protection from creditors. This is so because the business is a distinct legal entity from its owners and executives. Creditors cannot directly pursue payment from the firm owners’ personal assets in the event of debt or bankruptcy. As it restricts their liability, this can be a crucial kind of protection for the shareholders and directors.
Tax reduction
Additionally, a private limited corporation has the benefit of higher tax-deductible expenses and costs that can be offset against revenue.
Continuity in business
Consider a scenario in which you are a business owner, a solo proprietor, and you want to take some time off. Your business will also need to be put on hold or shut down if you get sick or decide to retire. This implies that you reserve the option to choose alternatives to take charge when you’re not there.
Ease of Fundraising
Up to 200 shareholders and an additional 200 members are allowed in a private limited company. It is simpler to raise capital funding for private limited companies than for other kinds of enterprises because of these vast numbers and their good reputation. Therefore, we may assert that the scope of expansion is bigger when a private limited company is established. It is also simple to collect debts from banks and other financial entities.
The Bottom Line
Private limited companies provide a number of major advantages that can be very helpful for enterprises of all sizes, including start-ups. Companies can benefit from restricted liability, tax benefits, and more commercial credibility by incorporating and following the necessary procedures.
Further, it is considerably simpler for private limited firms to raise money from shareholders and outside investors. Given all these advantages, it is simple to understand why this business is so well-liked by entrepreneurs and small enterprises. For more details, connect with our experts at StartupFino.
