Legal Implications of a Private Limited Company

When it comes to starting and operating a business, a lot of factors need to be considered. This also includes whether or not to set up your business as a private limited company.

While this is one of the most preferred types of business entity for many small and medium businesses, it is also important to know the perks as well as the legal complications that come with it.
What is a Private Limited Company?

• A Private Limited Company or also known as a Privately held company or close corporation is a separate business entity whose shares are offered, owned, and traded privately and are not available for trade in the stock market.
• They are simple and the most popular form of Business registration in India and can be registered by two people (minimum).
• It places restrictions of ownership and like mentioned doesn’t allow the trade of shares to the public and also provides protection to shareholders by making the business a separate legal entity.

Due to these features, the law has offered private limited company corporations with benefits and exemptions that are not available for the public companies.

Minimum Requirements to Register:

The minimum requirements to register your business as a private limited enterprise is simple as follows:

1. Requires a minimum of two directors
2. It is required that one of the directors has to be a citizen of India and Indian resident, while the other can be a Foreign National
3. It is required to have at least two shareholders for the company which can be a natural person or also an artificial legal entity.

While the private limited company is the most preferred form of business registration for small businesses as it brings along a bunch of advantages to the business; it might not always be the best option.

In this blog, we will discuss the disadvantages of a private limited company and ways it may not be ideal for certain businesses.

Advantages of a Private Limited Company

Private limited company is still one of the most ideal types of business registration for doing business in India due to its many advantages. Here are some of the benefits of Private Limited Company Incorporations:

1. Limited liability protection offers shareholders protection during financial constraints or even winding up of the company. In cases like this, the members are not at the risk of losing their personal assets.
2. The private limited company restricts the trade of shares which can be advantageous as it doesn’t allow outside parties to take over.
3. The privately-owned corporation remains a separate entity and operates as such.
4. The company continues to exist even in case the owner dies or leaves. This is why private limited companies are mostly recommended to family-owned or small business enterprises.

Disadvantages of Private Limited Companies

1. Registration Process

One of the major disadvantages of registering a business as a private limited company is its tedious registration process. Registrations for a Private limited company are compulsory. It can be often complicated and takes up a minimum of two weeks to process. Apart from this, the cost of registration is also quite high. And with the added restrictions to the capital market and shareholders, it becomes even more difficult for small businesses to afford. But once registered, private companies can enjoy a wide range of advantages which will be discussed in the later part of the blog.

2. Restricted Access to Capital Markets

A significant disadvantage when it comes to owning a private limited enterprise is that it loses access to the capital market. When operating a business, it is important to have access to the capital and tap into the market to find external investors to buy their shares which are not possible for privately-owned companies. Due to their inability to list, own, and trade their shares to the public they are excluded from the stock exchange market trade.

3. Compliance Formalities

After the private limited company incorporation are required to comply with a range of formalities. This includes appointing a statutory auditor within the first 30 days after the company’s incorporation, holding a board meeting at least four times a year, general meetings, audit accounts, file annual returns with the Ministry of Corporate Affairs every year, and many other corporate formalities.

4. Division of Ownership

The minimum requirement to start a private limited corporation is that it needs two people as appointed directors and shareholders to the company. This leads to a division in ownership. A person looking to solely own and operate a business cannot register as a private limited company. This means every decision requires the consent of the two directors involved.

5. Personal Liability

Although the company is itself liable to its debt and shareholders enjoy limited liability protection, there can be cases such as follows, where personal liability of the members would also occur:

• When the company has been misdescribed in any contract or act, the person involved shall be personally liable for it
• During the winding-up of the company, if any acts to defraud the creditors or any misconduct has been carried out, those who were intentionally involved shall be held liable to the debts of the company.

6. Winding of the Company

Winding up a privately owned company can be quite complicated. The process is often costly, time-consuming, and tedious. This is why it is important that business partners only register their company as a privately owned firm if they are serious about operating a business.

Final Thoughts

We hope this helped! While a private company has its set of advantages and disadvantages, one needs to weigh its pros and cons and make the best possible decision before deciding on the type of business entity.

Need help and guidance to choose and register your business entity? We are here for you!

At ChhotaCFO, we offer Virtual CFO service solutions for Startups, SME’s and Corporate Enterprises with a range of services that help start, maintain and grow your business. We offer the right kind of guidance and service to help you succeed.

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