Why should you start a private limited company?

There are multiple factors an entrepreneur should consider before choosing the type of business one plans to register. The size and nature of business, fund raising, scale etc should be considered before choosing the type of business entity. Here are some of the reasons why you should register your business as a private limited company.

Limited Liability

One of the main advantages of starting a private limited company is limited liability. Limited liability means limited exposure to financial risk by investors of a company. Limited liability means the shareholders liability in the company is limited to the capital amount invested in the company.

For example, if Sam invested Rs 100,000 to start a private limited company. The liability is his investment of Rs 100,000. In other words, his can potential loss cannot be beyond Rs 100,000. He won’t be liable for any liability beyond this initial Rs 100,000.

Business Continuity

Private companies enjoy perpetual succession. What does perpetual succession mean? Shareholders may come and go, but the company still continues to be in existence. The company is unaffected by the death of any of its shareholders or the transfer of its shares to another person.

For example, in a partnership firm, a change in the membership leads to dissolution of the existing partnership whereas in a private limited company, one shareholder may transfer his shares to another, but the company still continues to operate.

Fund Raising

Financial institutions such as banks, venture capital funds, private equity funds lend their resources more willingly to private limited companies that to other forms of business organizations.

Banks are more likely to lend to limited companies because they can use the assets of the company as security for the loan. Venture capital firms invest in a private limited company in exchange of equity shares; this cannot be achieved in a partnership firm.

Transfer and Exits

Limited companies are easier to sell as compared to partnership firms. Ownership is represented by equity or preference shares and these can be easily sold without affecting the activities of the company.

Salaries to directors

There is no maximum limit on the salary being paid to directors; whereas there is a ceiling limit on the salary paid to partners of a partnership firm as per Income Tax Act, 1961.