Private Limited Company Registration Advantages & Disadvantages

Private limited company registration is the major aspect that works for business operations. It is necessary to go over the advantages and disadvantages of private company registration in India. 

Before we start any business, there is always a question mark in our mind, whether the decision to the formation of a private limited company for our business is correct or not. 

What benefits should we get by forming a Private Limited Company Registration? Is there any advantage or disadvantage of forming a private limited company? For rapid growth of business in India, one should need to understand different types of business in India and which type of company formation is suitable for the business. 

Types Of Private Limited Company Registration -

• Private Company limited by shares: The liability of the members is limited to the amount unpaid to the company concerning the shares held by them.
• Private Company by Guarantee: Here the members’ liabilities are limited to the amount of money they guarantee to pay in case the company is wound-up.
• Unlimited Companies: The liability of members is unlimited in this type of private company. Personal assets of members can be attached and sold when the company is being wound-up.

Definition of a private limited company in India

• Section 2(68) of the Companies Act, 2013 defines private limited companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. There are basic criteria that differentiate private companies from public companies.
• The Section further says private companies can have a maximum of 200 members (except for One Person Companies). This number does not include present and former employees who are also members. Moreover, more than two persons who own stocks jointly are treated as a single member.
• This definition had previously prescribed a minimum paid-up share capital of Rs. 1 lakh for private companies, but an amendment in this section removed this requirement. Private companies can now have a minimum paid-up capital of any amount.

REQUIREMENT TO FORM A PRIVATE LIMITED COMPANY REGISTRATION:

• A minimum of 2 directors are required who are adults.
• One of the directors of a private limited company has to be an Indian citizen and should be a resident of India.
• Shareholders of the company can be natural persons or an artificial legal entity.

PRIVATE LIMITED COMPANY REGISTRATION ADVANTAGE 

1. Capital and shareholder requirements: There is no minimum capital requirement; earlier it was a minimum of Rs. 100000/-. That means there is no such pressure on fund requirements. To incorporate a private limited company Minimum of two shareholders is required. This allows many Entrepreneurs to set up their own companies easily. Nowadays many startups are from their companies.

Separate Legal Entity: Private Limited Company Registration In India considers a separate legal entity because as per Law directors of the company consider different people. Both company and director are counted as different for management and ownership. The assets and liabilities of the Directors are not the same as the assets and liabilities of the Company. Directors’ and shareholders’ assets are safe from any business-related risks, only the amount invested in starting the company would be lost. A popular case study of Salomon v Salomon explains the separate legal entity concept.

Easily transfer of shares in case of a private limited company: Shares are transferable by a shareholder to any other person easily and for that share transfer forms need to be filed. The provisions of section 81 further issue of capital do not apply to a private limited company.

Stability due to Limited Liability: The liabilities are limited to their shares only. So it protects the personal assets and income of shareholders at times of financial crisis. This feature gives the company more liberty to take risks.

Raising funds easily: If a private limited company is incorporated the scope of expansion is greater than other forms of business. Private limited companies can raise funds from Venture Capitalists or Angel investors easily. A private company has more borrowing options than LLP, Bank loans are not easily available for OPC and LLP, but the option of issuing debentures and convertible debentures is always available to private limited companies.

Perpetual succession concept: Private limited company follows the perpetual succession concept, if the owner of the company dies or leaves the company, the existence of the company is continued. ‘Perpetual Succession’ is one of the most important features of a company, its existence is continued until it’s legally dissolved.

Easily Exit: Private limited companies can be sold or transferred easily without disrupting the current business operations. It can be sold or transferred, either partially or wholly.

Create Reputation of business: Running a business through forming a Private limited company creates a Reputation of business in the market, this will help to attract new investors and also helps in competing in the market of your industry.

Without taking a public search no one can inspect the financials of the company: Copies of the balance sheet and profit and Loss Account field with the register cannot be inspected by the public unless and otherwise the search is taken on the MCA website. Shareholders have greater risks and liabilities.

PRIVATE LIMITED COMPANY REGISTRATION DISADVANTAGE 

Resources are limited: The private company cannot have more than 200 shareholders as per the new Indian Companies Act. Earlier this number was restricted to 50.

Division of Ownership: A major disadvantage of a private limited company is that it requires a minimum of 2 (two) persons to act as directors and shareholders. A sole proprietor who wants to form the company alone cannot create a private limited company. For any decision, he requires one more person, and the result of that is part of the profit also shared with the member.

Winding of a company: In comparison to an unregistered partnership firm, the process of winding up a company is difficult, complicated, time-consuming, and expensive. So anyone who wants to create a private limited company should create one for business purposes only.

Cannot issue prospectus to the public: Like public Limited companies private limited cannot issue prospectus to the public. This means it cannot invite the public to subscribe to shares. 

Restriction on transfer of shares: Main disadvantage of a private limited company is that it cannot transfer its share as restricted by its article. Shares of the private limited company cannot be quoted on the stock exchange. As a result shareholders of the company cannot leave the private company easily and quickly.

Audit of financial statement: Audit financial statements of the private limited company must be audited except by the companies act.

Difficult to register as compared to sole Proprietorship: Private limited company process is difficult as compared to sole Proprietorship. Private Limited Company Registration Process takes a longer period and involves a process and cost which do not apply to a sole proprietorship.

Compliance formalities: A private limited company requires several compliances after incorporation. a private limited company is required to hold board of directors meetings, Annual general meetings, audit of accounts, and maintain many types of registers like the register of the member, register of Directors and KMP, Register of Sweat Equity Shares, Register of ESOP, Register of Debenture Holders or any other security holders. The private company has to file an annual return with the ROC each year. In addition to the corporate compliance formalities, a company would also have to maintain tax and labor laws compliance, which apply to it.

No valuation of shares: As shares of the private company are not listed on the stock exchange, there is no value addition of market shares. So the shareholder does not know the real value of his investment in the private limited company.

Lack of public confidence in the private limited company: Public has less confidence in a private limited company as its affairs business is not known and it is not subject to strict control under the law.

Q What types of benefits a Private Limited Company Registration can enjoy in India?

A private limited company can commence its business activity immediately after incorporation. A private limited company can give financial help for purposes of its shares or its holding company shares. A Private Limited Company Registration may allot shares without issuing a prospectus or delivering to the Registered a statement instead of a prospectus.

Q Director of the private limited company required to hold the share qualification?

No, the Director of the private limited company is required to hold the share qualification.

Q Can a private limited company be converted into a public limited company?

Yes, private limited companies can be converted into public limited companies and vice versa. MOA and AOA need to be altered accordingly. If the registrar checks all the documents and all are as per the required law then he will close the former company and issue a fresh certificate of incorporation.

Q Is one Person Company also a private limited company?

Yes, Section 3(1) (c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies. OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess. OPCs can have only one member or shareholder, unlike other private companies. A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.

Q What is the difference between a Memorandum of association and an article of association?

During registration, every company needs to file a Memorandum of association which contains basic details of the company and its purpose of incorporation. The Article Of Association provides the guidelines or framework on which the company needs to operate by directors. 

MOA has the following clause:

• Name Clause
• Registered Office Clause
• Object Clause
• Association Clause
• Capital Clause
• Liability Clause

Q Why Incorporation of Private Limited Company Registration forms are rejected due to registered office address?

During incorporation many times clients are not providing a full address for the registered office, registered office address should be capable of receiving and acknowledging all communications and notices by ROC. If the address itself is not sufficient then always provide a nearby landmark for better communication.

Q How much period is required for incorporating a private limited company?

Generally, 1 to 2 days is required for incorporating a private limited company without any resubmission case, the ministry is working to make this a 1-day Process. In case of resubmission, it will take 3 to 4 working days after submitting the documents. 

Q is it mandatory to add a Private Limited after the company’s name ex. ABC PVT LTD?

Yes, this is a legal requirement, if the company is incorporated as a Private Limited Company, it is mandatory to add a Private Limited Company after the company’s name. In case a company is incorporated as a Public Limited Company, the suffix needs Limited (Ltd) is required to be added.

Q Is it mandatory for a private limited company to publish or release its annual report for Public access?

It is mandatory for all the private limited companies which are registered under the Ministry of Corporate Affairs to file their annual reports with the concerned ROC every year, but Private Limited Companies don't need to publish or release their annual report for Public access.

Q Is Annual filing compulsory fast track exit closure of a Private Limited Company due to failure to commence business?

No, Annual filings of private limited companies are not required for the fast-track exit closure of a Private Limited Company which failed to commence business.

There are some criteria which are as follows:

Assets and Liability should be NIL if applying for Fast Track exit.

At least one year must have passed since the last business activity or operation or a private limited company should not have commenced any business activity or operation since incorporation.

Q. Through what method private limited companies can be closed?

Closing the company is a more painful procedure than the incorporation of this company. There are different types of procedures by which one can close down a Private Limited Company legally.

• Selling the Company- Selling the Company is the common method where the owner of the private limited company can sell all the shares of the company and all of the rights and responsibilities to any third person. 
• Strike off the Company- A Company which become a defunct company and that desires to get its name struck off from the registers of ROC can apply to the registrar in the form Fast Track Exit form. Also, the registrar of the company can strike off the name of the defunct company by providing the opportunity of being heard by the company. 
• Voluntary Winding Up-Voluntary winding up process occurs when the members of the private limited company and the creditors decide among themselves to close down the company. 

Q What type of documents are required for the private limited company registration?

Following the documents are required at the time of the Incorporation of a Private Limited Company registration in India:

• Photograph of passport size of all the Directors
• Self-certified copy of PAN Card of all the Directors
• Self-certified copy of identity Proof of all the Directors (Driving License/Passport/Voter ID)
• Electricity Bill/ telephone bill/Bank statement or any other utility bill for the address proof of the Registered Office

Q. Now the procedure of Private Limited Company registration in India is better than the earlier procedure?

Yes, the process has been simplified and modified by the MCA. MCA has simplified the process by recently replacing the earlier SPICe form with a new web form called SPICe+ (SPICe Plus). Hence, Incorporating a Private Limited Company is an easy process now. 

Private Limited Company Registration Process in India through SPICe Plus (SPICe +):

With the introduction of SPICe plus, now applicant can Incorporate a Private Limited Company, with a Single application for Name reservation, Incorporation, DIN allotment, Mandatory issue of PAN, TAN, ESIC, EPFO, Profession Tax (Maharashtra) in the name of the Company, and Opening of Bank Account. 

SPICe+ is divided into 2 parts PART A and PART B

PART A is for  - Name reservation for the company – Applicant can apply with 2 names in or also apply for filing Company registration in one go through this form 

PART B is for the following services:

Incorporation

DIN allotment

Mandatory issue of PAN

Mandatory issue of TAN

Mandatory issue of EPFO registration

Mandatory issue of ESIC registration

Mandatory issue of Profession Tax registration(Maharashtra)

Mandatory Opening of a Bank Account in the name of the Company and

Allotment of GSTIN (if so applied for)

The SPICe+ application form is filed in two ways:

Applicants can apply for Part A (Name Reservation) and Part B (All Other Services) can be applied for on a simultaneous basis. But in that case, only one proposed name is allowed to be entered in PART A and all the documents are prepared in that proposed name only by mentioning the company under incorporation. 

Applicants can apply Part A initially, and upon reservation of the name, Part B can be applied for. 

 

Online XBRL is the leading platform for compliance and legal services. So connect now for Best Private Limited Company Registration services in India.