Many startup founders are not sure as to why they should have a private limited company for their startup and struggle to gather the right information. At Compliance Calendar LLP, we have been helping first time entrepreneurs since 2016 in Company Registration. In recent years, India has seen a significant surge in startup establishments, becoming the third-largest startup ecosystem globally. However, many startups operate at a smaller scale initially, serving local customers with low turnovers, making it challenging to attract necessary investments. To overcome these challenges and encourage growth, experts often recommend the Registration of a Private Limited Company.
Benefits of Private Limited Company Registration
Private Limited Companies offer several advantages that make them a preferred choice for startup owners. They are not only easy and affordable to incorporate but also carry legal credibility. Additionally, they are exempted from various mandatory legal compliances under the Companies Act 2013, enhancing their appeal. As legal entities, they can sue third parties in court and provide features like limited liability, complete separation of ownership, business, and management, making them a cost-effective and profitable option for startups.
1. Limited Liability
Private Limited Companies provide limited liability for shareholders, distinguishing them from proprietorships and partnerships. Shareholders are not solely responsible for the company’s gains or losses; instead, both income and liability are distributed based on a predetermined ratio agreed upon during incorporation. This feature not only attracts investors but also shields shareholders from financial hardships during crises, making it a significant benefit.
2. Attractive to Investors
Private Limited Companies are attractive to investors due to their growth potential and historical success in the Indian market. Recognizable names like Parle, Google, American Express, Coca Cola, and Jaguar are Private Limited Companies, contributing to their popularity. This makes them an appealing choice for entrepreneurs aiming to establish themselves in their respective industries.
3. Preferred by Banks and Financial Institutions
Private Limited Companies require mandatory registration, enhancing their credibility as government databases contain authentic information about them. This credibility makes them more favorable to banks and financial institutions, ensuring that investors’ and creditors’ money is secure. Unregistered businesses like proprietorships and partnerships compromise their credibility, lacking visibility on government databases.
4. Perpetual Existence
Private Limited Companies enjoy perpetual existence, independent of the lifespan of their owners. This distinct feature allows them to continue operating even after changes in shareholder status, such as death, resignation, or retirement. Unlike proprietorships and partnerships, private limited companies can easily transfer shares to new owners, ensuring their indefinite existence.
5. Low Income Tax
Private Limited Companies offer tax holidays for shareholders under Section 80 IAC of the Income Tax Act, providing relief for three consecutive financial years. This, coupled with lower legal and tax compliance costs, makes them an attractive option for startups seeking financial advantages.
6. Easy to Incorporate
The introduction of the SPICe+ application has made the online registration process easy for Private Limited Companies. This reduces paperwork, time, and costs, making incorporation more accessible for entrepreneurs. The simplified, online process is a significant advantage for startups looking for an efficient way to establish themselves.
7. Low Minimum and High Maximum Limit of Shareholders
Private Limited Companies require only two shareholders to register and start operations, providing flexibility for smaller companies. With a maximum limit of 200 shareholders, this structure allows startups to gather substantial investments for future growth. This flexibility is advantageous for startups with local beginnings but global aspirations.
8. No Minimum and Maximum Capital Requirement
The Indian government has eliminated the minimum capital requirement for private limited companies, allowing businesses to register with no authorized capital. This change benefits startups that may struggle to arrange capital initially, leveling the playing field with established businesses. Additionally, there’s no maximum capital limit, providing the freedom to gather as much investment as needed.
9. No Mandatory Requirement to Appoint an Audit Committee
Private Limited Companies are exempted from the mandatory requirement to appoint an audit committee, unlike listed and public companies. This exemption reduces compliance costs and potential monetary penalties, contributing to the overall cost-effectiveness of private limited companies.
10. Power to Sue
As legally incorporated entities, private limited companies have the power to sue third parties in court to resolve disputes. This legal privilege ensures that the company can protect its rights in case of conflicts, a benefit not available to unregistered entities.
CONCLUSION
Startups in India have the option to choose between a Private Limited Company, LLP, or partnership firm, with the former emerging as the most viable option. The discussed benefits provide the understanding of why private limited companies are an optimal choice for startups in India. However, it is important to note that while reserving the name of the company under Spice Part A in MCA, there may resubmission from CRC if there is similar Companies or LLPs or have Trademark Registration with existing prefixes already.
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