Choosing the right type of company can dictate the future of your business, and it is hence a crucial factor. There are many options available, ranging from limited liability partnership, sole proprietorship, public company, or private limited company. This article here will explain how choosing a pvt limited company is a better option over a sole proprietorship. However, before we jump on to the part about making a choice between the two, let us first understand how both of these companies work. Then, we will go through the main differences and features of these companies so you can make an informed decision yourself.
Private Limited Company
A Pvt limited company is an organization that is not open to trading shares with the general population. Moreover, there are a lot of reasons why a private limited company is a fantastic choice for many in the business world.
Some of those reasons are mentioned below as the salient features of a pvt limited company:
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Members
One only needs a minimum of two directors or shareholders to establish a private limited company. The maximum number of shareholders can go as high as 200, and the company can appoint as many as 15 directors.
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Perpetual Succession
Bankruptcy, insolvency, and even the death of any of the directors of the company do not affect the existence of a pvt limited company. Therefore, the company will continue to exist in any of the cases.
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Index
A private limited company is not mandated to maintain an index of all its members, which is not the case for other types of companies.
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Limited Liability
Limited liability means that in case of bankruptcy or insolvency, the personal assets of a director would be safe. The threat is simply limited to the shares he owns.
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Separate Entity
Since a private limited company is a corporate body, that means that its existence is distinct from its members. Therefore, in legal terms, an individual and his private limited company are two separate entities.
Sole Proprietorship
As the name clearly implies, a sole proprietorship is a business owned by one/sole owner with the purpose of earning profits.
A few salient features of the sole proprietorship type of company are listed below:
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Single Owner
A sole proprietorship has one owner only that facilitates the formalities, making them more accessible and more straightforward to deal with.
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Existence
When we talk about sole proprietorship firm, the death of the sole owner affects the existence of the company. Perpetual succession is not one of the provisions here, and no one else can take over after the original owner.
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Liability
In case of heavy losses, the personal assets of the sole owner are also captured, as they are not treated separately from the business assets.
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Single Bearer
While being the single bearer of profits sounds fruitful, the sole owner is also the sole bearer of losses, if any. There is no way to shift the losses to someone else.
Why Choose a Pvt Limited Company Over a Sole Proprietorship?
Now, as we have learned and understood the salient features of both types of companies, let us reflect on why a private limited company is a better choice over a sole proprietorship. Their stringent compliance requirements are only one reason, and below are some other benefits of a pvt limited company:
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Limited Liability
As discussed earlier, in case of heavy losses, the risk of paying for them is limited to the value of a director's shares. His personal assets are safe from such losses. However, this is not the case with a sole proprietorship, as the owner's personal assets are acquired to cover the losses there.
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Perpetual Succession
A director's death, insolvency, or bankruptcy can not interrupt the existence of a private limited company. However, a sole proprietorship would cease to exist in case of the owner's death, as no one else is allowed to take over after the original owner.
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Tax Burden
There are many provisions available for a private limited company to relieve their tax burden and lower the charges. These provisions are a part of the Income Tax Act 1961. On the other hand, there are no such tax provisions for a sole proprietorship.
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Hostile Takeover
The risk of a hostile takeover is limited in a private limited company as the trading of shares is performed in a restricted manner here.
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Separate Legal Entity
A private limited company is separate from its members and exists legally. This means that it can sue, be sued, or disposed of as a separate legal entity where members are different from the company. In a sole proprietorship, any legal trial against the company is considered a trial against the owner himself.
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Exemptions
There are many exemptions granted to the private limited company in terms of compliance regulations as well. They are hence easy to maintain when compared to the sole proprietorship.
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Bankruptcy Proceedings
Since a private limited company enjoys a separate legal existence, it is not possible to dissolve the company. Hence, liabilities can not possibly be written off, and there can never be any bankruptcy proceedings against a pvt limited company.
Conclusion
A sole proprietorship may seem a better choice initially, with no interference from anyone else and no compliance requirements whatsoever. However, it needs more legal support in terms of exemptions, tax relief, and more. In fact, it is not even granted a separate legal status which is only a drawback in unfavourable situations. As we have established that a private limited company is a better choice, you should start registering your company. Lawgical India can help you with all types of company registration, and you can contact our legal experts for the same. Visit our website to learn more.
