Advantages of a Private Limited Company

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When starting a business, it’s important to be clear on the kind of operation you want to build. This is because only from your vision can you derive the type of business you need to register. For most mid- to -large-sized businesses, the preferred form of business is the private limited company, which is frequently picked over the limited liability partnership. This is so because the private limited company has many more features, even if it is a little more expensive. Here are its advantages:

Limited Liability: Businesses often need to borrow money. In structures such as General Partnership, partners are personally liable for all the debt raised. So if it cannot be repaid by the business, the partners would have to sell their personal possessions to do so. In a private limited company, only the amount invested in starting the business would be lost; the directors’ personal property would be safe.

Access to Funding: Private limited companies easily accommodate equity funding as there is a clear distinction between shareholders and directors as well as limited liability. In fact, venture capitalists and private equity funds are unlikely to invest in any other structure. This is because LLPs would require them to become partners in the business, while an OPC can have only one shareholder. This feature also gives you the ability to hire top talent you may not be able to afford by merely paying a salary.

Debt-taking Capacity: A private limited company has more options for taking on debt than LLPs. Not only are bank loans easy to obtain (relative to OPCs and LLPs), the option of issuing debentures and convertible debentures are always available to it.

Greater Credibility: A private limited company must make a lot of information about its structure, operations and financials available to the Registrar of Companies. This information ends up in the public domain. Therefore, vendors, lenders, employees can all find information relating to the company, such as authorised capital, names of directors, registered office, etc. This information makes a business more credible than entities that don’t have to furnish this information (such as partnerships and proprietorships).

Easy Exit: Private limited companies can be sold or transferred, either partially or in full, to another individual or entity without any disruption to the current business.

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Vakilsearch's resident expert on starting up, compliance and accounting, he holds a Masters in Accounting and an LLB.

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