The Pros and Cons of Choosing a Private Limited Company Structure In India

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The Pros and Cons of Choosing a Private Limited Company Structure In India

A Private Limited Company  is a type of business entity that offers limited liability to its shareholders, flexibility in management, and easy transferability of shares. In India, PLCs are governed by the Companies Act, 2013, and are the preferred business structure for startups and small businesses. It’s one of the most popular business structures in India. If you’re thinking of going for a private limited company registration online, this article is for you.This article will discuss the pros and cons of choosing a private limited company structure in India.

Pros of private limited company registration 

Limited Liability

One of the most significant advantages of a PLC is that it offers limited liability to its shareholders. This means that the shareholders’ personal assets are not at risk if the company incurs losses or is sued. In the event of the company going bankrupt or facing legal action, the shareholders will only be liable for the amount of capital they have invested in the company.

Flexibility in Management

PLCs offer greater flexibility in management as compared to other forms of business entities. The management structure of a PLC is divided into directors and shareholders, and the shareholders have the power to appoint and remove directors. This allows for greater transparency in decision-making and ensures that the company’s interests are aligned with those of the shareholders.

Easy Transferability of Shares

PLCs have a well-defined structure for share ownership, and shares can be easily transferred between shareholders. This makes it easier for the shareholders to exit the company when they want to and for new shareholders to invest in the company. The easy transferability of shares also makes it easier for PLCs to raise funds through equity financing.

Brand Value

A PLC has greater brand value as compared to other forms of business entities. This is because a PLC is a registered legal entity and is recognized by law. This gives customers, suppliers, and investors more confidence in the company’s ability to operate and deliver its products and services.

Tax Benefits

PLCs are eligible for various tax benefits under the Indian Income Tax Act. For example, the dividends paid to shareholders are tax-free, and the company can claim tax deductions for various expenses such as employee salaries and rent. This makes PLCs a more tax-efficient business structure.

Cons private limited company registration 

Regulatory Compliance:

PLCs are required to comply with various regulatory requirements, such as filing annual returns, holding annual general meetings, and maintaining proper books of accounts. Non-compliance can result in penalties and legal action. This means that PLCs require more time and resources to comply with these requirements.

Cost of Incorporation

The cost of incorporating a PLC is higher as compared to other forms of business entities. This is because PLCs require more legal and administrative work, such as drafting the Memorandum and Articles of Association, appointing directors and auditors, and registering with the Registrar of Companies.

Restrictions on Shareholders

One of the main drawbacks of choosing a private limited company structure is the restrictions on shareholders. In India, a PLC can have a maximum of 200 shareholders, which means that it may not be suitable for businesses that require a large number of investors. Moreover, shares in a PLC cannot be publicly traded, which further limits the ability of shareholders to transfer their shares. This restriction can make it difficult for shareholders to sell their shares if they want to exit the company, which may limit the liquidity of the shares.

Furthermore, PLCs may not be the best option for businesses that plan to go public in the future. This is because a PLC cannot list its shares on a stock exchange, and to go public, it will have to convert to a public limited company, which involves significant legal and administrative work.

Limited Flexibility in Management

While PLCs offer greater flexibility in management as compared to other forms of business entities, they still have certain restrictions on the management structure. For example, the directors are appointed by the shareholders, and they have to follow certain procedures and regulations. This can limit the flexibility of the management to take quick decisions and respond to market changes. In some cases, the decision-making process can be slowed down due to the need to obtain shareholder approval for important decisions.

Moreover, PLCs are required to hold regular board meetings and general meetings of shareholders, which can be time-consuming and may lead to delays in decision-making. These restrictions may be a disadvantage for businesses that require a high degree of flexibility and quick decision-making to respond to market changes.

Lack of Privacy

PLCs are required to disclose certain information to the public, such as the company’s financial statements, director’s report, and auditor’s report. This lack of privacy can be a concern for some business owners who prefer to keep their financial and operational information confidential. Public disclosure of financial information can also make it easier for competitors to gain insight into the company’s operations and strategies.

Moreover, PLCs are required to maintain accounting and bookkeeping and file various regulatory returns with the Registrar of Companies, which can be time-consuming and costly. The requirement for regular reporting and public disclosure of information can also create a burden on the management and distract them from focusing on the core business operations.

Conclusion:

In conclusion, a PLC offers several advantages, such as limited liability, flexibility in management, and easy transferability of shares, tax benefits, and greater brand value. However, there are also several disadvantages to choosing a PLC as a business structure, such as regulatory compliance, cost of incorporation, restrictions on shareholders, limited flexibility in management, and lack of privacy. Ultimately, the decision to choose a PLC as a business structure will depend on the specific needs and goals of the business owners. It is important to carefully consider the pros and cons of a PLC and seek professional advice before making a final decision.