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.
Features of a Private Limited Company for more details.
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Limited Liability
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.
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Members
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.
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Separate entity
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.
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Perpetual succession
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.
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Index membership
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.
Sole Proprietorship
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.
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Unlimited Liability
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.
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Single owner
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.
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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.
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Company existence
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 after Private Limited company incorporation ultimately trump this feature.
Here are the reasons why you should go for a Private Limited Company instead of a Sole Proprietorship.
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Reduced risk
For Private Limited Companies, the risk for a hostile takeover is significantly lower as it is only five in a restricted way.
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Limited Liability
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.
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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.
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Perpetual succession
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.
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Exemptions
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.
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Tax Burden
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.
What is the difference between a sole proprietorship and a Private limited company?
Difference Between Sole Proprietorship and Private Limited Company:
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Ownership:
– Sole Proprietorship: In a sole proprietorship, a single individual owns and operates the business. The business and the owner are considered one entity.
– Private Limited Company: A private limited company is a separate legal entity with shareholders as owners. The ownership can be distributed among multiple shareholders.
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Liability:
– Sole Proprietorship: The owner has unlimited personal liability. Personal assets are at risk to cover business debts or liabilities.
– Private Limited Company: Shareholders’ liability is limited to the extent of their shareholding. Personal assets of shareholders are generally protected.
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Legal Formalities:
– Sole Proprietorship: Minimal legal formalities are required for the formation and operation of a sole proprietorship. The owner is personally responsible for all aspects.
– Private Limited Company: The PVT limited company registration involves more legal formalities, including registration, compliance with the Companies Act, and the issuance of shares.
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Transferability of Ownership:
– Sole Proprietorship: Ownership is not transferable as the business is tied to the individual proprietor.
– Private Limited Company: Shares can be transferred, allowing for changes in ownership without affecting the continuity of the business.
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Decision-Making:
– Sole Proprietorship: The owner has complete control over decision-making and operations.
– Private Limited Company: Decision-making is shared among shareholders, and the company is managed by directors appointed by the shareholders.
Conclusion
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.
FAQ
What is better - sole proprietorship or private limited company?
The choice depends on factors like business size, liability concerns and growth plans. Small businesses may opt for sole proprietorship, while larger enterprises often choose private limited companies for limited liability and scalability.
Why is sole proprietorship better than a company?
Sole proprietorship is simpler to set up, has fewer compliance requirements and offers complete control to the owner. However, it comes with unlimited personal liability.
How Can a sole proprietorship be called a company?
A sole proprietorship is not technically a company. It is a business structure where a single individual owns and manages the business. The term 'company' is generally associated with incorporated entities.
Who can use the Pvt Ltd Company?
Private Limited Companies are suitable for businesses looking for limited liability, multiple shareholders and the ability to raise capital through share issuance. They are commonly used by medium to large-sized enterprises.
What are the disadvantages of having a sole proprietorship?
Disadvantages include unlimited personal liability, limited ability to raise capital and the business being closely tied to the owner, which can limit scalability.
Who is higher - CEO or founder?
In a private limited company, the founder may also be the CEO. However, the CEO is a designated position responsible for the overall management, and the founder may or may not hold this role.
