This post discusses the multiple benefits you can gain by choosing to go with a Private Limited Company rather than a Sole Proprietorship. It mentions essential features of both types of companies and compares them on critical points.
You need to carefully choose the type of company you will form as it is a crucial factor for the future of your business. Therefore, it is essential to choose the right type for your company. You can form numerous types of companies, such as a Limited Liability Partnership (LLP), Public Company, Private Limited Company, Sole Proprietors, etc. This article will mainly discuss two types of companies; Sole Proprietorship and Private Limited Company. This post also discusses why you should choose a Private Limited Company over a Proprietorship.
Although, before you learn about the reasons to opt for a Private Limited Company over Proprietorship, you should understand how these companies work. You need to know what the features and differences between these companies are before you choose for yourself. Reading about how these companies function will help you to make informed decisions for your company.
What Is a Private Limited Company?
You must understand what a Private Limited Company is before you decide what type of company you need. A Private Limited Company is a company that is owned and held privately. A Private Limited Company is an organisation held privately, which means that no one can trade the various shares of the company in the common population. These companies are pretty popular and have essential features that make them a powerful business vehicle.
Read the following list of essential features of a Private Limited Company for more details.
Limited Liability refers to the risk of the personal assets held by the shareholders, and the directors are lower if there are any increased losses. Only the value of the specific shares helped by certain shareholders and directors will be at risk.
If you want to start a Private Limited Company, you must have at least two directors or shareholders. Moreover, you can only have 200 directors or shareholders of your company simultaneously. It gives the company the right to appoint around 15 directors.
All Private Limited Companies are corporate. A body corporate usually means that the company is a separate legal entity and is not connected to the shareholders and the directors.
If any directors face bankruptcy, insolvency, or death, the company doesn’t die with them. In fact, the company will continue to live after this.
Most companies have to keep an index of their members carefully. However, a Private Limited Company does not have to keep an index of its members.
As you can guess from the name, a Sole Proprietorship is a type of company in which there is only one trader or owner who does business with the simple goal of earning profits.
Read the following essential features about a Sole Proprietorship.
Unlimited Liability suggests that the owners of any company with Sole Proprietorship have all the liability to cover the losses incurred by the company with their personal assets.
A Sole Proprietorship, as the name suggests, has a single owner whose only aim is to make profits. It is pretty easy to register for a Sole Proprietorship as it has far lower formalities.
Single person who faces losses and gains profits
The individual who owns the Sole Proprietorship is the only one who incurs the loss and enjoys the profit. It is borne by the sole proprietor only. The sole proprietor can’t give the responsibility of dealing with the charges of losses to someone else.
If the sole proprietor of this type of business has passed away, it severely impacts the company’s life. No one can take over the company after the sole proprietor passes away. Therefore, no perpetual succession can occur, and the company will die with the sole proprietor.
Reasons to Opt for a Private Limited Company Over Proprietorship
After reading and thoroughly understanding the different Features and a Sole Proprietorship, we can now look at the numerous reasons a Private Limited Company is better than a Sole Proprietorship. The proprietorship has a slight benefit over other types of businesses since it has fewer stringent compliance requirements. However, the numerous benefits of a Private Limited Company ultimately trump this feature.
Here are the reasons why you should go for a Private Limited Company instead of a Sole Proprietorship.
For Private Limited Companies, the risk for a hostile takeover is significantly lower as it is only five in a restricted way.
For Private Limited Companies, another great benefit is that the risk of the personal assets of a shareholder or a director is only to the extent of their shares. This means that the personal assets of the shareholders and the directors are safe and cannot be seized to pay the company’s debts. On the other hand, in a Sole Proprietorship, the owner would have unlimited liability.
Separate Legal Entity
As you know, Private Limited Companies are corporate. This means that they are allowed to dispose of the property belonging to the business, to sue or be sued, and they are separate from the members. However, in a Sole Proprietorship, the owner is the same as the company. If there are any legal proceedings against the company in case someone decides to sue it, the owner will get sued automatically.
A Private Limited Company continues to live even after the directors depart for any reason. It allows the company to live on and not die with the owner. But for a sole proprietorship, if the owner is dead, bankrupt, or is facing insolvency, no one can take over from the owner, and the company will cease to exist with the owner.
Private Limited Companies are way better than a Sole Proprietorship as they need much less maintenance. They have been granted numerous exemptions for operations and compliances.
The Income Tax Act of 1961 has given numerous prividio8to Private Limited Companies to reduce the tax rates and relieve their tax burdens. This would benefit your company’s profits and allow you to perform better.
There are numerous benefits that you can enjoy by choosing a Sole Proprietorship, such as having no obligations or compliance. But, Private Limited Companies have a clear separation of identity and assets and a seamless operation structure. Hence, it is better to choose a private limited company over a proprietorship. If you are looking for some more assistance, in this case, make sure you are getting in touch with Vakilsearch.
- Types of Company Registration in India
- How to Get Private Limited Company Registration
- Incorporating a Private Limited Company