If you want to make it big in the future and have adequate opportunities to expand, the private limited model is the best way to structure your company. In this read, we’ll be discussing the various advantages of incorporating a private limited company.
What is a Private Limited Company?
A Private Limited Company is a business structure commonly used by small to medium-sized enterprises (SMEs) and startups. It is a legal entity separate from its owners (shareholders). It is governed by the Companies Act or equivalent legislation in the respective country. In a Private Limited Company, ownership is divided into shares, and shareholders are not personally liable for the company’s debts beyond their share capital contributions. This structure offers several advantages and benefits for businesses, making it a popular choice for entrepreneurs. Let’s see the advantages of a private limited company in detail.
Minimum Requirement of a Private Limited Company
To establish and operate a Private Limited Company, certain minimum requirements need to be met, which can vary by country. Common requirements include:
- Minimum Number of Directors: Typically, at least two directors are required, and one of them must be a resident of the country where the company is registered.
- Minimum Number of Shareholders: A Private Limited Company must have a minimum number of shareholders, often as few as two and a maximum of up to 200 shareholders.
- Registered Office: The company must have a registered office address within the country where it is incorporated.
- Name Reservation: The proposed name of the company must be unique and not infringe on existing trademarks or businesses.
- Paid-up Share Capital: There is often no specific requirement for minimum paid-up share capital, although some countries may have nominal requirements.
Advantages of Private Limited Company
Advantages of Private Limited Companies offer several, including:
- No Minimum Paid-up Capital: Many countries do not impose a minimum paid-up capital requirement for Private Limited Companies, making it accessible for startups and small businesses.
- Separate Legal Entity: A Private Limited Company has its own legal identity, distinct from its owners (shareholders). This separation provides protection to shareholders’ personal assets in case of business liabilities.
- Limited Liability of Members: Shareholders’ liability is limited to the amount invested in the company, protecting their personal assets from business-related debts and obligations.
- Fund Raising: Private Limited Companies can raise capital by issuing shares to investors, making it easier to attract investments and grow the business.
- Perpetual Existence: The company continues to exist even if the shareholders change, providing stability and longevity to the business.
- Foreign Direct Investment (FDI): Private Limited Companies often attract foreign investors and foreign direct investment (FDI) due to their structured legal framework and limited liability.
- Credibility: The structure of a Private Limited Company enhances credibility and trustworthiness in the eyes of customers, suppliers, and investors.
- Free & Easy Transferability of Shares: Shares in a Private Limited Company can be transferred or sold relatively easily, providing liquidity to shareholders.
- Owning Property: A Private Limited Company can own property, enter into contracts, and conduct business activities in its own name.
- Dual Relationship: Directors and shareholders can have dual roles within the company, allowing for effective management and control.
- Borrowing Capacity: Private Limited Companies can borrow funds from banks and financial institutions based on their assets and financial position.
- Capacity to sue and be sued: A Private Limited Company can take legal action (sue) or be sued in its own name, ensuring legal protection for its interests.
These benefits of Private Limited Companies are a popular choice for entrepreneurs looking to establish a structured and liability-limited business entity.
Frequently Asked Questions
How private company is better than public company?
Private companies are often considered better than public companies in certain respects due to their distinct characteristics. Some advantages of private companies over public companies include:
- Control: Owners have greater control over decision-making and operations.
- Privacy: Private companies have less stringent reporting requirements and can keep financial information confidential.
- Flexibility: Private companies can focus on long-term growth without the pressure of quarterly earnings reports.
- Stability: Private ownership provides stability, as it's not influenced by fluctuations in stock prices.
- Fewer Regulatory Obligations: Private companies face fewer regulatory and compliance requirements.
However, the choice between a private and public company depends on specific business goals and circumstances.
Can one person own a private limited company?
Yes, in many countries, including India, one person can own and operate a Private Limited Company, which is often referred to as a One Person Company (OPC). OPCs are legal entities designed to accommodate single entrepreneurs, providing limited liability and legal separation between the owner and the business.
What are the characteristics of a private limited company?
Characteristics of a Private Limited Company typically include limited liability, a separate legal entity, a limited number of shareholders (often up to 200), restriction on share transfer, perpetual existence, and the ability to raise funds through equity shares.
Can one person open a Pvt Ltd company?
Yes, one person can open a Private Limited Company in many countries, subject to compliance with legal requirements. This type of company is often known as a One Person Company (OPC).
How do private companies work?
Private companies operate similarly to public companies but have distinct differences, such as limited ownership, fewer regulatory obligations, and a focus on long-term goals. They are owned by individuals, a group of shareholders, or a single entity and can engage in various business activities based on their industry and business model.
Why is it called a private limited company?
A Private Limited Company is called so because it has restrictions on the number of shareholders it can have, typically limited to a maximum of 200 shareholders. The term limited implies that the liability of shareholders is limited to their capital contributions.
How many employees are required for Pvt Ltd?
There is no specific requirement for the number of employees to establish a Private Limited Company. You can start a Private Limited Company with just one employee, such as the owner or director.