Benefits of creating a Private Limited Company for Indian Start-Ups

Introduction

It is widely agreed that private limited companies are among the most common types of companies to register in India. Two people are all that is needed to start the registration procedure. Due to its many advantageous features, including shareholders' limited liability, access to equity funding, and separate legal status, the corporation is the ideal business form for new enterprises.

Prerequisites for a New Indian Private Limited Business are the following-

• We require at least two Directors to be of legal retirement age.
• At least one director must be a legal resident of India and a citizen of India.
• The other Director(s) need not be citizens of India.
• Establishing such a corporation requires the participation of at least two shareholders.
• Every kind of legal entity or natural person can be a shareholder.

Startups in India

What are the odds of business success, especially when starting, and especially in a nation like India where the population is so large that practically everyone wants to establish their firm?

Due to its accessibility and low operating costs, India has been a popular choice for new businesses. To begin with, not everyone has access to a lot of money. In terms of the background of startups in India, the following information may serve as a primer:

• India's startup ecosystem ranks third globally
• Approximately, annual growth that is seen in Indian startups is around 12-15%.
• Low-cost workers are easily accessible.

It's important to know exactly what kind of company you want to launch before you do anything else. This is because the kind of company you need to register can only be seen with your own eyes. Private limited companies, rather than limited liability partnerships, are the preferred business structure for most medium- to large-sized enterprises. This is because, despite incurring slightly higher start-up and ongoing costs, a private limited business has far more capabilities and benefits.

Here’s why a Private limited company is better for startups

A private firm has many benefits that a startup might make use of. There are many advantages to forming a private limited company for a startup or even for a new business, including:

1. No minimum paid-up capital

The Companies Act of 2013 was updated in 2015 to remove the need for any minimum paid-up capital for forming a private company. Once upon a time, it was Rs 1 lakh. Those who were concerned about the cost of finance before launching their business benefited greatly from this change.

2. Access to Funding

Equity financing is easily adapted to limited liability organizations. In addition, this type of organization benefits from limited liability. Private equity and venture capital firms are quite unlikely to back a company with any other organizational structure.

This is because to engage in an LLP, one must take on the responsibilities of a business partner, whereas an OPC can only have one shareholder. Because of this, private limited enterprises may afford to hire highly skilled workers that they otherwise couldn't.

3. Boost the credibility of the business

Today's buyers, sellers, and financiers all want to know that the companies they do business with can be trusted. By forming a private limited company, the relevant details are recorded in a government database that can be searched by anybody. This includes the business's name, date of incorporation, registered office address, and status. This function makes it simple to verify the company's existence, which boosts the reliability of the enterprise. The Indian Ministry of Corporate Affairs has no record of the partnership or sole proprietorship. Inconveniences of different kinds will result. By incorporating as a private limited company, business owners can ensure that crucial details about their organization, such as its legal standing, registered address, and name, are readily available to potential clients and financiers. It's great for the company's reputation as a whole.

4. Debt Capacity

A limited liability partnership (LLP) has fewer borrowing choices than a private firm. Unlike OPCs and LLPs, private limited companies have access to both bank loans and the opportunity to issue debentures and convertible debentures.

5. Limited liability

The limited liability of private firm stockholders is another major benefit that is absent in publicly traded companies. Limited liability can be either restricted by shares or limited by guarantee. This means that in the event of a financial crisis or trouble at the company, shareholders will only be required to pay their proportionate part of the costs. That's a huge boon for a young company.

For example, if a PLC borrows money and then can't repay it, its shareholders are only liable for the proportion of the debt that corresponds to the value of their shares that hasn't been paid. In other words, if you own shares in the firm but have no outstanding balance on those shares, you have no liability for the company's debts or credits, regardless of how long such debts or credits go unpaid.

6. No public interference

The third benefit of launching as a private firm is that operations can get off to a good start without much scrutiny from the general public. When a company issues shares to the public, it can set its standards for growth without interference from the stock market. Policy decisions can be made independently by private companies.

7. The attraction of Foreign Direct Investment

A private company has another major benefit: it is more likely to attract foreign direct investment (Foreign direct investment). Foreign and multinational corporations typically seek out partnerships with private companies rather than public ones because the former tend to generate higher profits.

8. Separate legal entity and perpetual succession

An additional benefit (available only after formal registration) is being treated as a distinct legal entity and having the ability to continue in existence indefinitely, both of which are familiar to both public and private firms. The meaning of these provisions stands on its own. Given these advantages, private limited companies are preferable for new businesses because of the inherent ability to file and defend against legal claims.

9. Easy Exit

When first starting, most entrepreneurs focus solely on growing their firms and never formulate an exit strategy. When starting a business, private limited firms are the greatest option for promoters looking to cash out. All that is required for the sale or transfer of a going concern is the ownership shares in the company. Because of this, forming a private limited company gives you a significant advantage when formulating and carrying out an exit strategy for your business. There is no need to worry about a halt in business operations when selling or transferring a private limited company to another person or organization.

10. Going International

Foreign direct investment of up to 100% is permitted through the automatic method in private limited firms and limited corporations exclusively; this means that any foreign entity or foreign person may invest in a company without needing to obtain a previous government clearance. It is illegal for a sole proprietorship, partnership, or limited liability company to take investments from a foreign entity without first receiving permission from the government. Hence, a private limited company is the most suitable legal structure for a corporation with global expansion plans.

Conclusion

The nature of the legal entity is crucial to a young company's success. The foundation of a new venture is critical to its eventual success. It will be difficult for such an entity if the first step is miscalculated. A lack of proper planning can make the early stages of a company's existence difficult. Whether forming a public or private corporation, prospective incorporators should weigh the benefits and drawbacks of each option carefully before deciding. While many different types of businesses may be created, a Private Limited Company is the best option for new businesses.