When incorporating any business in India, it is important to structure it as per the company laws prevalent in that state. In India, a company can be incorporated as one person company, public limited company and private limited company. Although private limited companies are beneficial as they act as separate legal personality hence negating any financial liability on the members of the company.
But there are a specific restriction and drawbacks of structuring your operations as private limited companies such as these that have been listed below:
Private limited companies are restricted from selling their stocks in the stock market. This limits the company from attracting investors that want to trade through shares. The shareholders are also restricted from transferring or selling shares to people who are not members of the company.
The cost of incorporating a Private Limited Company is very high in comparison with the capital invested. Government fees for incorporating a company including the cost of Digital Signature is more than Rs. 10,000/-
On the other hand, Company needs to fulfil the compliances which also incur a cost. Moreover, Post Incorporation Compliance cost more than 18,000/- annually. But remember compliances are necessary for any type operations you wish to start.
Every Company has Legal formalities like Filing the Annual Returns, Income Tax Filings, Meetings, Records of Meetings, Invitation for the Meetings, Shareholders Meetings, Separate Directors Meetings, etc.
Avoiding the Legal formalities will result in high penalties and even imprisonment of Directors
The company needs to have two shareholders, regardless of the role of the other shareholder. Any major decision concerning the business requires the involvement of both the owners.
Whereas;
The government recently introduced the concept of One Person Company in which only One Person can be the shareholder of the company. One Person company can only be operated up to the turnover of Rs. 2 crores and capital of Rs. 50 Lakhs. Then OPC should be converted into another form of Business.
One of the key disadvantages of a private limited company is that it narrows down the liability to itself. In case of debt, profit or loss the company is wholly liable.
The liability may extend to the owners or members when the matters go beyond the boundary of the company, in cases where it is found that the company was involved in the business that was against the national policy of the country or if the nature of the business was fraudulent.
Or, when the contract or the agreement concerning the company stands faulty on legal grounds or any discrepancy is found regarding the management of the private limited company.
The process of winding up of the private limited company takes a toll on the budget as it incurs a lot of costs. Not only it is time-consuming, but it is also quite a complicated affair.
That is why before setting up of an Ltd company the entrepreneurs should consider all options and then make their final move keeping in mind about the future possibilities.
Read More on: Winding up of Private Limited Company.
Specific rules and regulations are to be followed while naming an Ltd company, thus a lot of care is required to select a name which is in adherence to the law.
Whereas the advantages of a private limited company are concerned, it eases out the burden acquired due to tax as it invites greater flexibility regarding tax on profits and personal income. It also tags the company with the status of being proficient thus increasing the market value of the company.