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Advantages and Disadvantages of Private Limited Company

advantages and disadvantages of private limited company

What is a Private Limited Company?

A private limited company is a particular class of privately held small businesses. It refers to a recognized legal body that private investors govern. A Private Limited Company’s members are only accountable for their shares. Shares of Private Limited Companies cannot be exchanged openly.

Minimum Requirements For Private Limited Company

Every sort of company must meet a specific set of standards to be incorporated. Analyzing the requirements is the first step in preparing to register a company in India. The following conditions must be fulfilled for a private limited corporation to be established:

  • At least two directors must be of legal age.
  • A minimum of one Director is required who is both an Indian citizen and an Indian resident for a Private Limited Company.
  • One or more of the other Directors may be foreigners.
  • At least two stockholders are required.
  • The shareholders may be living individuals or fictional legal organizations.

Private Limited Company Registration Process 

You can register your private limited company within days. You must go through a process and pay fees that do not apply to unregistered firms like proprietorships.

Once you’ve decided on a company name for your venture, proceed with the processes below to form a private limited company:

  • Getting a digital signature certificate (DSC)
  • Name Availability Application (SPICe+ Part A) (INC-32)
  • Proposed Company Filing Information (SPICe+ Part B)
  • Submitting e-MoA (INC-33) and e-AoA forms (INC-34)
  • Issue of PAN, TAN, and Certificate of Incorporation

Advantages of a Private Limited Company

A private limited company has several authorities and privileges once registered, making it simple to get a payment gateway or create a bank account.

  • Individual legal entity – A Private Limited Company is an independent legal identity in a court of law. The company’s assets and liabilities are distinct from those of the directors. Each is valued differently. A Private Limited Company separates Management from Ownership; as a result, managers are accountable for the company’s success and failure.
  • Limited liability – A distinct legal entity will create for your company. It implies that you won’t be held legally or financially accountable if something goes wrong, such as if you’re sued or can’t pay your debts. Since the loan is connected to the business, all your assets will be secure, including your savings, home, and car.
  • No Minimum Investment – A Private Limited Company can be incorporated with no minimum capital. A Private Limited Company may be formed with just Rs. 10,000 in total Authorized Share Capital.
  • Sharing 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.
  • Obtaining funds – Except for Public Limited Companies, a Private Limited Company is the only firm that can raise money from Angel investors or Venture Capitalists in India.
  • Income benefits – There are tax advantages in addition to lowering personal liability. It can shield you from increased income tax rates since 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.
  • FDI Accepted – 100% Foreign Direct Investment is permitted in Private Limited Companies, which means that any foreign business or foreign individual may invest directly.
  • Share transfers are free and straightforward – Shareholders may transfer their ownership in a business limited by shares to any third party. Compared to the transfer of a partnership or proprietary concern-run company interest, the transfer is simple. It is simple to transfer shares by completing a share transfer form, signing it, and giving the buyer a share certificate.
  • Reduced taxes – More tax-deductible expenses and allowances you can offset against profits are advantageous for private limited companies.
  • Continuous existence – A Private Limited Company possesses ‘Perpetual Succession, which is continuous existence until its formal dissolution. A company is a distinct legal entity that is unaffected by any member’s death or other departure and remains active despite membership changes.
  • Enhances credibility – A public database contains the company’s information. It improves the company’s reputation because it’s straightforward to check the information.

Disadvantages of a Private Limited Company

For most firms, the advantages exceed the drawbacks, but there are certain things to consider before switching to a limited company. The disadvantages of doing so are described below.

  • Registration Process and Setup expenses – A process and costs are involved in registering a private limited company that is unnecessary for an unregistered business. 
  • Shared Ownership – The requirement of a minimum of two individuals to function as Directors and shareholders is a significant drawback of private limited companies. Therefore, a private limited company must be founded by someone other than a lone entrepreneur who wants to launch and run a business alone. Therefore, any significant choice a firm makes will always need the approval of two people. Even if only one shareholder has a small percentage of the company’s shares, there still must be two shareholders.
  • Compliance procedures – After incorporation into a private limited business, you must follow several regulations. All companies must maintain a statutory register yearly, hold the board and general meetings, examine their financial records, and file yearly returns with the Ministry of Corporate Affairs. 
  • Corporate accounts – When registered as a limited business, the required financial information is more complicated. In addition to corporate compliance requirements, a company must follow applicable tax and labour laws, which differ according to the type of corporate entity.
  • Restrictions on Share Transfers – The AOA of a private limited company prohibits the transfer of shares, and these shares are not permitted to be offered on public markets.
  • Can’t Release Prospectuses – The public cannot subscribe for shares of a private limited business through the issuance of a prospectus. No stock exchanges will accept the company’s shares for listing.
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