Being an entrepreneur, the first critical, as well as the most vital question that comes to mind is selecting the perfect type of business entity and incorporating the company under that entity. As the market for entrepreneurs is booming, it is the time to delve into a lucrative career with the foundation of your own company, and that envisioned success needs the first step as registering your company as a business entity. At a point when you suffer from terrible indecision regarding the proper choice, this article might show you a way out. Keep reading this article till the last to get the answer to your question of why to open a private limited company in India. But before that, let’s become familiar with the idea and characteristics of a Pvt. Ltd. company.
What do you understand by a Private limited company?
As the name indicates, a Pvt. Ltd. company is a business entity that is legally established and privately operated. The definition looks so simple and this simplicity may prompt you to start a private limited company. The next question that should come to your mind is how to open a company in India under the entitlement of a private limited company? The wise suggestion goes thus, keep your excitement under control and follow the next part of the article to know, whether a Pvt. Ltd. company is suitable for you or not.
Characteristics of a Pvt. Ltd. Company
The procedure to open a private limited company in India may appear to you as easy as ABC, but you should proceed only after analyzing the characteristics of a private company.
Under the Companies Act, 2013, a private limited company registration requires a minimum number of two shareholders. Being a closely held entity, the maximum cap of members is limited with the number of 200. As the number of members is limited, it provides you an upper hand to manage your company efficiently.
There is no such minimum paid up share capital requirement under Companies Act, 2013. A private company can be incorporated with a Minimum authorized and subscribed share capital of Rs. Two.
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Benefits of incorporating your company as a Private limited company
There are multiple reasons and benefits to registering your company as a private limited company and here are some of the advantages explained in a detailed manner.
One of the chief benefits of a Pvt. Ltd. company is limited liability. The concept of limited liability is that the members of that company will not be at risk to suffer a loss of their private asset if the company incurs losses, further shareholders are liable to the company only up to any unpaid amount subscribed by them in the company. For instance, Jack wants to be a shareholder and he invests an amount of 2,00,000 rupees to open a private limited company in India. In any case, if the company fluctuates drastically, Jack’s potential loss cannot go beyond that amount, which means his liability is up to the amount he invested in that company.
A private limited company enjoys the advantage of perpetual succession. Is it an alien term for you? Let’s make it more clarified. Since a company enjoys a separate legal entity than its shareholders, it has a perpetual succession, it may hint at the fact that the existence of the company is not a subject to termination, whether the stakeholders come and go, it doesn’t affect anyway, the existence of your business entity. Be it the death of a shareholder, or the transfer of their share to another person, the company is never going to face the threat of being obsolete.
To establish a company, financial support is paramount and that places the matter of fundraising before the question of how to register a company in India. Financial institutions and intermediaries like venture capital funds, private equity funds, NBFCs, and banks lend more likely to private limited companies. Banks have the interest to lend money to companies as banks would be able to use the assets of those companies as securities. So, while registering any entity in India, one has to keep in mind that financial support plays the most vital role in the growth of any business entity, and registering your company as a Pvt. Ltd. company could help you attract those financial institutions.
A limit has been imposed, in case of a partnership firm, regarding the salaries of the partners. As per Income Tax Department guidelines, the interest, to be paid to the partners, shall not exceed 12% per annum. But, in the case of the private limited company, there are very few restrictions with regard to salary and perks to the directors, plus the company can also distribute dividends to its shareholders from the profits earned by the company, hence it’s a lucrative form of entity for every entrepreneur.
Transfer and exits
Another important advantage of opening a private limited company in India is that these private limited companies are very easy to sell in comparison to partnership firms.