Proprietorship is a popular type of unregistered business entity owned, managed, and controlled by one person. Most of the micro and small businesses operating in the unorganized sectors prefer registering a Proprietorship.

Sole Proprietorship is simple to start and has very few regulatory compliance requirements for conducting the operation. Proprietorship registration is ideal for entrepreneurs who are getting into the business for small businesses with few clients.

What is Private Limited Company?

Private Limited Company is the most popular type of business entity in India. Over 20 lakhs companies have been registered in India as of October 2020 and 12 lakhs companies are classified as active. All companies registered in India are governed by the MCA (Ministry of Corporate Affairs) under the Companies Act, 2013.

Entrepreneurs register a company in India to create a business that is well regarded by customers, suppliers, bankers and the Government. By setting up a company, an Entrepreneur has the ability to create a small or large business that can easily raise capital and scale seamlessly to any size.

The ownership of a company is represented by shares. Thus, the ownership of a company can be shared or transferred to any other Indian or Foreign legal entity or person. The directors of a company are also easily replaceable. Hence, on a company allows an Entrepreneur to easily raise capital and transfer ownership without any hassles.

A private limited company provides limited liability protection to its shareholders. In case of any unforeseen losses, statutory or legal liabilities, the shareholders of the company will not be held responsible. Only the Directors of a private limited company are held responsible in most instances for various statutory liabilities.

A company can raise equity capital from persons or entities interested in becoming a shareholder. Entrepreneurs can raise money from angel investors, venture capital firms, private equity firms and hedge funds. A company can also raise debt financing from banks, financial institutions and NBFCs easily.

A private limited company is recognized as a separate entity with a dedicated PAN. Using the PAN and incorporation certificate of the company, an Entrepreneur can within days open a current account in any bank.

Reasons to Register a Company in India

Entrepreneurs choose to register a company due to various reasons. Two of the main reasons is that a company is a distinct legal entity having perpetual succession. Hence, a company is not affected by the death, insanity, or insolvency of an individual member. The following are some of the top reasons to register a private limited company in India

Separate Legal Entity

As per Law, a company is an artificial judicial person established under the Companies Act. A company is a separate legal entity from its Directors and Shareholders. Hence, a company enjoys a wider legal capacity, to own property and incur debts – while the individual company members owe no liability towards the company’s creditors for debts.

Perpetual Succession

Perpetual succession means continuing or enduring forever., A company is considered to be legally active until it is wound up by its members through a legal process. Hence, perpetual succession denotes continuous existence of a corporation or company till it is dissolved legally. Thus, a company is unaffected by death or departure of any member.

Owning Assets

A company can acquire, own, transfer any type of tangible or intangible asset in India. A shareholder is not eligible to claim the company’s property, as they are not owners of the company. A shareholder merely has an interest in the company arising under the articles of association of the company, measuring a sum for liability.

Transferability of Shares

The ownership of a private limited company is determined by the number of shares held by its shareholders. Shares of a company can be transferred to any other person or legal entity in India or abroad, subject to the articles of association of a company and the shareholders agreement. The easy transferability of shares is one of the top reason, Entrepreneurs opt to register a company.

Equity Raising

A company is the only type of legal entity which can help the promoters raise equity funding from Angel Investors, Private Equity Firms and the Stock Exchange. A private limited company would suffice for raising equity funds from Angel Investors and Private Equity Investors. In case of listing or allotment of shares to more than 200 shareholders, a Limited Company would be required.

FREQUENTLY ASKED QUESTIONS

What is authorized capital and paidup captal?

Authorised capital is the maximum value of equity shares that can be issued by a company. On the other hand, paid up capital is the amount of shares issued by the company to shareholders. Authorised capital can be increased any time after incorporation to issue additional shares to the shareholders.

Limited liability is the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, the liability of the shareholders with respect to the company’s liabilities is limited.

Yes, NRIs, foreign nationals and foreign entities can register a company and invest in India, subject to the Foreign Direct Investment norms set by the RBI. However, incorporation rules in India require for one Indian national to mandatorily be a part of the company on the Board of Directors.

Yes, every company registered in India must have a registered office where all official communication is sent by the MCA, governmental agencies, financial institutions, etc., The registered office of a company can be in any state of India.

Once the company is incorporated, a current account needs to be opened in the name of the company for transactions. The bank in which you want to open the account submit the documents like certificate of incorporation, Memorandum and Articles of Association, board resolution, copy of PAN allotment letter and utilities bill.

GST registration is mandatory for certain businesses. Companies dealing with e-commerce operations or any other interstate activity and companies with turnover of more than Rs. 40 Lakhs are required to obtain the same.

A company is required to maintain certain compliances once it is incorporated. An auditor needs to be appointed within 30 days and income tax filing and annual return filing needs to be done every year. Apart from these, mandatory compliances like ‘Commencement of Business’ forms, and DIN eKYC also needs to be done.