Should Startups go for Private Limited Company? or Should they work as a Proprietor?

These questions confuse every startup and all we get confused when we think of it. It’s a dream of everyone either to work for a brand or create a brand but creation of brand needs Efforts, Right platform and many more.

When startup starts their business they usually prefer to go with Private Limited Company and every time I ask them, why you want to create a Private Limited Company? Why don’t go for Proprietorship or Partnership firm?. Most of the time questions are unanswered.

So I suggest them first analysis that, does your business really need of a Private Limited Company or you can work simply as Proprietorship or Partnership firm?

Confusion starts when we don’t know, what benefits am I supposed to analysis. So I have elaborated few benefits which you can read and may take decision on the basis of it.

Advantages of Private Limited Company

Funding:

Company raises funds from its shareholders. The Banking and Financial Organizations are more likely to assist a Private Limited Company rather than other forms of business. In current scenario Angel Investors and Venture Capitalists also prefer to invest in Private Limited Company.

Distinct Legal Entity:

The Private Limited Company has a distinct existence. It is not a natural person or human being as we are. Private Limited Company is permitted to own property along with incurring debts. Members and Promoters are separate from the company. Who are not bound by any act of the company. Hence the distinct legal entity that benefits the members.

Limited liability:

Members are not accountable for the debts of the company. The shareholders are only liable for their share of money which they’ve invested in the company. Shareholders liability is limited to their unpaid amount of shares only.

Tax Advantages:

Private Limited Company enjoy the tax advantage as compared to Partnership Firm or Limited Liability Partnership (LLP). In Income tax act for domestic company tax rate is 25% for Assessment year 2019-18 if turnover in the previous year 2016-17 doesn’t exceed Rs. 250 crore. In case of Partnership firm or LLP Income tax rate is 30%.

The Scope of Expansion:

There is a higher scope of expansion because it is easy to raise capital from the financial institutes. A Private Limited Company can be easily converted into other forms of business. It can be converted into a Public Limited Company.

Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. The company may bring an action against anyone in its own name.

There are other benefits which a Private Limited Company can avail.

  • A company can issue Employee Stock Option plan (ESOP), which is possible if you are a company. Every company wants to make a long term relationship their trusted employees so ESOP is best way to make them feel like a owner of company.
  • In Private Limited Company salaries are paid to directors without any limit subject to reasonability but in partnership firm limit of salary is depends on Profit of firm.

 

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