There are two types of companies: Public Limited Company and Private Limited Company.
When someone wants to set up a business in India, there are basically three ways to go about it:
1) Sole Proprietorship
2) Partnership Firm
3) Company (we’ll focus on Private limited company).
In simple terms “Company” = “Limited Liability”. So let’s explain that first. A limited liability company has its owners called shareholders, but they have limited liability for the debts of the company – which means if the company has debt or is sued, the shareholders’ personal assets are safe.
Why Incorporate a Private Limited Company?
Incorporating a Private Limited Company in India is basically forming a separate legal entity for one’s business activities. The assets of the business are not owned by its shareholders or directors, so they will not be held liable if say, someone slips and falls on your office floor. There have been many instances where people have wanted to work on their own, but didn’t because of the fear that if something went wrong in their business they would be liable for it. With a private limited company you are no longer an individual working on your own, but a separate legal entity which is accountable only to its shareholders and not to the public.
Another advantage of incorporating a Private Limited Company is limited liability. If say, one person wants to work on their own, but doesn’t want to go through all the formalities or paperwork involved in setting up a separate legal entity then they can simply continue working as before- just without any liabilities attached! The only liability will be to your financers who gave you investments because if things did go wrong then they would have to find another investor out there to invest in your business.
If you are looking to raise money for business, then incorporating a Private Limited Company is the best option. It can make it easier to convince big investors because when they invest in your company, even though you are the only shareholder, since it is a private limited company their investment will provide them with preference shares. You can use this fact to raise funds or request loans from banks and other institutions that have restrictions on lending money without collateral security- simply by adding another share of preference! This will give these individuals an incentive to put their hard earned cash into your business because they stand to gain more than just putting their money into any random individual’s business.
Another important characteristic of private companies is being able to raise money through incorporation. It builds credibility when you are looking to build business relations with other companies. It gives the impression that your business is much more than just another individual trying to run their own business, but a professional company which has been legally framed and is backed by financial institutions. This fact can be used to gain valuable contacts in the field of your business, quite literally giving you the upper hand over any random individual!
What if someone wants to take advantage of all these benefits without actually paying for them?
Well there’s good news for you- trade marked private limited companies are allowed up to 100% FDI (foreign direct investments) without needing prior government approval! This means that even though there will only be one share holder who may or may not be foreign, other people will still be able to invest in your company. This fact can help you take your business international without taking the risk of dealing with multiple government policies that need to be met by an Indian company trying to do business outside India.
There are many licenses and registrations required for any new start up- another benefit of incorporating a private limited company! All these things combined give the impression that you have everything under control, which may or may not be true, but it’s certainly easier if you have a private limited company because all registrations have been taken care of for you including labour registration. If you go through all this trouble yourself then there is no telling what kind of problems might pop up later on- so rather than having headache after headache due to ignorance, you are better off with a private limited company that has already gone through all this trouble for you.
Another benefit of the added layer of security involved in setting up a private limited company is that your business can make use of FDI (Foreign Direct Investment) schemes. This means that even though you will only be dealing with one investor as a shareholder, other people will still be able to invest money into your company from outside India because it is a foreign direct investment. This fact gives the impression that you have a much more professional and successful business than what it actually is- all thanks to the government policies which encourage foreign investments! The best part about using FDI would have to be that there isn’t really any prior permission required, which means that your business will be able to expand internationally without any issues.
If you are the only shareholder in your company, then technically anything done by your company would be considered illegal unless it has been approved by you. However if you incorporate a private limited company then there will be multiple shareholders who own the company with you- meaning that their actions are not under your discretion because they are legally allowed to do what they want within the boundaries of the law. The benefit of having multiple people involved in the management is that even though it might turn out to be slightly more expensive, there is no way for one single individual to take advantage of all these benefits! This makes it much harder for someone to try and defraud investors since there will always be someone together with them who will be holding them together.
The main purpose of a private limited company is to create a legal, legitimate and successful business which has good benefits for the shareholders as well as the customers- not only that but it also looks much more professional and gives an impression of stability and credibility even if you aren’t actually capable of producing those results yet. These facts make incorporating a private limited company one of the best ways to run any sort of business because even though there may be some disadvantages to having such a complicated system, all these benefits really do outweigh them! And if you ever need any help then don’t forget that there are many articles like this one online that might be able to give you advice on what you should do next!
>Advantages of a Private Limited Company
A private limited company has some special benefits or mainly due to its legal status as a separate entity from its owners, which means:
Separate Legal Entity
As we’ve mentioned above, a private limited company is a separate legal entity with rights and liabilities distinct from those of its members – meaning it’s legally independent of individuals who own shares in it.
We just talked about this but let’s go into more detail: every shareholder in the company is not liable for debts beyond their contribution to capital (if they’re also on the board of directors). So if the company has $100 million in debt, the shareholders are only liable for $100 million.
Since private companies are separate entities, they’re free to sell shares and raise investment capital just like public companies – but without having to adhere to all the regulations public companies have to comply with (for example making financial statements available or disclosures of dividends). This is why fund raisings happen entirely within the company rather than via an issue of new shares on stock exchange like a public limited company would do.
Free & Easy transfer of shares
As long as it’s done by legal means (proper agreement), there are no restrictions on how shareholders can split or share their equity in the company. Shares can be transferred from one person or entity to another by sale, gift or inheritance.
In a private limited company there is no restriction on foreign direct investment from 100% foreign owned subsidiaries. In other words: Private companies can be 100% foreign-owned and still you will not need the Approval of Foreign Investment Promotion Board (FIPB) for them to invest in India.
Again due to its separate legal identity, the reputation and standing of shareholders in a private limited company does not affect the standing of the company itself – i.e., personal mistakes do not reflect poorly on the business’ reputation like they would if it were a sole proprietorship or partnership firm.
These are basically the characteristics of a private limited company
I’m a 23-year-old graduate who has taken up studying law lately.