TOP 7 REASONS TO INCORPORATE A STARTUP AS A PRIVATE LIMITED COMPANY

When an entrepreneur decides to incorporate his business, the primary question that arises is which business structure is best suited for the goals of his company. Often, the entrepreneurs commit the mistake of choosing a business entity without having any knowledge about the same. The long-term implications of this decision should be kept in mind before finalizing it and a professional must be consulted for some wise advice at the time of business registration. Often a question might arise regarding the costs incurred and the administrative workload as a sole trader entity in a Private Limited Company. The answer to it lies among the top 7 reasons for it being the best suited business entity for a startup i.e. Limited Liability.

TOP 7 REASONS TO INCORPORATE A STARTUP AS A PRIVATE LIMITED COMPANY

TOP 7 REASONS TO INCORPORATE A STARTUP AS A PRIVATE LIMITED COMPANY

 

When an entrepreneur decides to incorporate his business, the primary question that arises is which business structure is best suited for the goals of his company. Often, the entrepreneurs commit the mistake of choosing a business entity without having any knowledge about the same. The long-term implications of this decision should be kept in mind before finalizing it and a professional must be consulted for some wise advice at the time of business registration. As entrepreneurs, it is always sensible to utilize the right information at their disposal.

Out of 4 startups born every day in India, 75% register their startup as a Private Limited Company. Often a question might arise regarding the costs incurred and the administrative workload as a sole trader entity in a Private Limited Company. The answer to it lies among the top 7 reasons for it being the best-suited business entity for a startup i.e. Limited Liability. The reasons have been discussed in detail here.

 

  • LIMITED LIABILITY: One of the biggest advantages of a Private Limited Company is the limited or capped liability. The members and shareholders are released from the burden of debts in case the company faces huge financial losses. Unlike the sole-proprietorship business, the assets of the entrepreneur cannot be used to return money to the creditors. Personal assets and finances are secured.  However, in cases of extreme losses, the shareholders and members have to contribute only the nominal value of their shares that remains unpaid.
  • TAX SAVING: It is a well-known fact that corporate tax rates are much less as compared to income tax rates. Registration of the business as a Private Limited Company enables it to enjoy a lot of significant tax benefits. The company can choose to pay dividends to its shareholders instead of the usual salaries, as it has lesser tax reductions. It also provides huge scope to the employees to get pension contributions from the employers as it can be a deductible expense from the company.
  • CREDIBILITY AND FLEXIBILITY OF BUSINESS: The registration process of a Private Limited Company is quite transparent as compared to other business structures. This transparency attracts and gains the faith of creditors, investors, and customers. The proper documentation provides proof for the legal existence of the company thus helping it in meeting the basic requirements like opening a bank account. Since a Private Limited Company has autonomy it can formulate its own policies and implement them through a Memorandum of Association thereby proving its flexibility to adapt to the dynamic changes.
  • SEPARATE LEGAL ENTITY: A Private Ltd Company has a separate legal entity. It is not a property of the shareholders or investors; it is a property of the company itself. All legal documents and contracts are linked to the company and hence the company does not cease to exist if any shareholder or director changes or proves to be insolvent. It provides a sense of security to its employees and can only be formally dissolved or liquidated in a few cases as per the orders of the Registrar of Companies. A shareholder having a majority of the shares can also be held liable under the eyes of the law if he tries to misuse the funds or property of the company.
  • EASY FUNDING: For a business startup to begin, grow, and expand, funding is a very crucial and important aspect. A Private Ltd Company enables a business to issue shares and attract all types of funding that are available. A business cannot issue shares and equities in partnership and proprietorship thereby limiting it to self-funding which can prove to be a setback for startups. Thus, a Private Ltd Company proves to be the most suitable startup structure with respect to the funding.
  • CORPORATE PERSONALITY/STATUS: Since a Private Ltd Company allows international investors and companies to invest without any government approval; it makes it easier for the company to go global professionally. With increased competition, collaborations with foreign companies boost the business value and professional image of the company. It opens a number of business opportunities and ensures brand uniqueness in the market. This contributes to the corporate personality and thereby the corporate status of the company.
  • EXIT STRATEGY: This is said to be an entrepreneur’s strategic plan to sell their ownership in an organization to investors or to another company. It gives them a way to liquidate their business stake and to make a substantial amount of profit from it. These monetary benefits can help the entrepreneur in any future venture and can also provide relief against capital gains tax. Having a well-planned exit strategy is not easy in other business structures and thereby does not provide a smooth transition to the business.

In today’s time, young entrepreneurs are not only looking to capture the domestic market but they are seeking global opportunities. Registering their start-ups under a Private Limited Company would provide an edge to venture into multiple opportunities both in the domestic and the worldwide market.

 

BY:-

Ridhika Kapoor.