Private Limited Company is the most preferred structure for businesses that plan to grow big, get investments by way of equity, wish to offer sharing of ownership with employees by way of ESOP, wish to get FDI, etc.
The major advantage of Private Limited structure is the segregation of management from ownership. Directors form the management of the company, and Shareholders are the owners of the company.
Shareholders holding the majority of shareholding will have the right to appoint directors and such appointed directors run the day-to-day management of the company and go back to the shareholder for approval for major decisions.
The registration process for the Pvt Ltd company starts with obtaining digital Signature (DSC) for the proposed directors and subscribers to initial capital.
The application for registration of the company is submitted online, which is required to be authenticated by attaching the DSC of the directors and promoters (Initial subscribers to the shares).
Once Dsc is obtained, necessary Kyc and other docs are obtained from the directors and subscribers and attached to the incorporation application form.
The incorporation form (Spice plus) provides for obtaining DIN (Director Identification Number), Name Approval, Company Registration, PAN and TAN allotment, GST Registration, PF & ESI registration, and Bank account Opening.
The registration process usually takes about a weeks time, excluding the time for obtaining the notarized docs in case of non-residents director/promoters, or where a company is being registered as a subsidiary of a foreign company.
Following are the Major Advantages and Disadvantages of Private Limited Company
Private Limited is a Separate Legal Entity, district from its directors and shareholders. Private Limited is considered as a separate legal person, and the directors only represent such legal persons in their capacity as directors.
Pvt Ltd can sue and be sued in its own name. Pvt Ltd company continues to exist, even though there is a change of directors and shareholders.
Private Limited Structure allows the segregation of Management from the ownership. Directors are responsible for running the company and Shareholders are the owners of the company. Shareholder have the right to appoint the directors.
Directors run day to day management of the company and go back to shareholder for approval for major decisions. In the directors, there are two categories, i.e Executive / whole-time director and other/ Independent/non-executive directors.
Executive/whole-time directors are employees of the company and responsible for running day to day management, whereas non-executive directors act as overseeing authority for the executive directors and bring in diverse expertise.
This segregation of management from ownership is the major factor due to which private equity investors prefer Pvt Ltd structure for investment, as they can invest their funds and leave the management to be run by the promoters.
Pvt Ltd as the name indicates has the feature of limited liability, which means that liability of the company doesn't extend to the personal assets of the promoter or directors. The loan and liabilities of the company can be recovered only from the assets of the company.
This feature of Pvt Ltd company allows the promoters to take a risk that is required to be taken to pursue business growth without carrying the risk of losing the personal assets.
In case of a partnership, profit after taxes is free for distribution among the partners, and distributed profits are exempt from taxes in the hands of partners. This is unlike in the case of Pvt Ltd Company where profit distributed in the form of dividends is taxable in the hands of recipients.
Pvt Ltd company is regulated by the Registrar of Companies under the provisions of the companies Act. Companies Law has extensive provision to check mismanagement and misappropriation of company assets by management. Companies law provides for transparency by way of filing of accounts, annual returns, and other documents with the registrar of companies, which can be viewed by the public.
Shares held in Pvt ltd company can be transferred by the investor to another person, which need not affect the business of the company, this way Pvt ltd structure offers exit option for an investor in the business.
Secondly, the Pvt ltd structure allows shares to be allotted to the employees, by way of ESOP, Sweat Equity, etc, thereby giving scope for sharing of business ownership with employees.
Pvt ltd structure attracts more compliance burden as compared to other structures like LLP or Partnership firms. Appointment of Auditors, Audit of accounts, filing of annual accounts, filing of Annual returns, preparation of financials in the prescribed format, holding of a Board meeting and meeting of the shareholder is required to have complied with irrespective of the volume of business of the company.
Investment of funds in the company by way of debt is subject to restrictions. Funds can be borrowed only from directors, shareholders (subject restriction on the amount of loan) and companies. Whereas no such restrictions are applicable for LLPs or Partnership firms. Also, profit after tax is not free from distribution among the shareholders, they are again taxable in the hands of the shareholder as dividends.