When incorporating a business entity, a private limited company is among the best few options to get started.
And why not.
The owner’s or shareholders’ assets are fully protected, as all of them share limited liability in case of financial damages.
However, one almost always tends to miss the drawbacks of setting up a private limited liability company.
Do private limited companies have drawbacks?
Well! Yes. They do.
In this section, we are discussing the advantages and disadvantages of setting up as a private limited company.
Advantages of Private Limited Company
Separate Legal Entity
In business terminology, having a separate legal identity entitles a company or a business venture, to function separately from its shareholders and directors—meaning that the existence of the company is perpetual i.e. beyond the life of its director and shareholders.
Sharing Limited Liability
What most business owners usually seek from a business venture is maximum benefit with the minimum amount of risk involved. Creating a private limited company opens up the possibility. In a private limited company, the owners, shareholders, and business partners are normally bound to pay only a limited amount of money they have invested to help the company recover from financial losses such as bankruptcy. This also means that the company cannot forcefully use the personal assets of the shareholders, investors, or members to repay the debts or recover from financial damages.
Raising Capital is far too easy
One of the challenges a business venture faces in growing is raising capital. In this regard, private limited companies are far more credible, as they easily attract investors seeking to quickly build high net worth. Also, the investors do not actually need to be present in the day-to-day management of the business to benefit from it. These days, private limited companies have wholeheartedly embraced online accounting systems to make managing finances easy and manage company records properly.
Disadvantages of Private Limited Company
Despite the advantages listed above, private limited company incorporation and doing business in India have numerous disadvantages, which must be considered before deciding on a business entity for your business.
Setting up a private limited company is complicated
Registering a private limited company in India can include completing a lot of paperwork. Typically, the requirements may ask the applicants to adhere to certain formalities, like obtaining DSC within a limited time frame. But that is just the tip of the iceberg if you are a newbie in the arena. Without some professional help, the task can seem extremely tedious. The registration process takes place within 5-7 working days, which is not ideal for all businesses, including micro- and small-sized enterprises.
A private limited company requires post-incorporation compliances that will include an auditor’s appointment, holding board meetings and general meetings, maintaining statutory registers, and the mandatory compliance to file an annual return with the Ministry of Corporate Affairs every year. In addition, to follow corporate compliances, a company would also follow to maintain compliance with labour and tax laws, which are applicable irrespective of the business entities. If the compliances are not followed, the company faces a huge penalty, and continuous breaking of the rules will lead to the discontinuity or striking-off procedure.
Division of Ownership
One of the major disadvantages of a private limited company is that it requires a minimum of two people to act as directors and shareholders. A sole proprietor who wishes to incorporate and start a private limited company is unable to do so. Hence, any major decisions to be taken by the company would also require the consent of two people.
To empower entrepreneurs who wish to start their own company, the government introduced the concept of a one-person company.
Winding up of the company
The procedure for winding up a company can be very complicated, time-consuming, and costly. Hence, it is important for the promoters to register a company when they are serious about using the company to operate a business.
Author JustStart Bio: JustStart was incorporated with the objective of launching an online platform. The intended purpose behind launching the platform is to provide professional services in a very cost-effective way. Our goal is to be a long-term, value-added partner from start to finish.