Last Updated on March 8, 2023 by Kanakkupillai
Advantages of a Private Limited Company
A private corporation is one that has a relatively limited number of shareholders or members and is owned by non-governmental entities. The private stock of a firm is often owned and exchanged, as opposed to offering or trading its shares to the broader public on stock exchanges.
The Companies Act
The Companies Act of 2013 permits shareholders and members of different kinds of companies with differing degrees of liability to incorporate. Depending on the needs of the business, the promoters can choose between the following three types of private limited companies in addition to the organizations: limited liability partnerships, private limited companies, and one-individual companies).
Limited Liability Protection
Your assets are protected from litigation and company debts with limited liability. In other words, limited liability protection offers a crucial barrier for private assets. The source of limited liability is a well-run corporation or limited liability company. Learn how to employ this kind of legal protection because it is not without risk.
Separate Legal Entity
You and everyone associated with your business are considered to be separate legal entities(SLEs) when it comes to navigating the legal system. An SLE essentially means that in the event that you are sued for your business, the lawsuit won’t affect your personal finances. Additionally, all shareholders, partners, investors, and other stakeholders are directly safeguarded.
Benefits of a separate legal entity
Being a separate legal body provides certain advantages in addition to personal protection from being held personally liable in judicial actions. A company has its own legal rights when it is a distinct legal entity.
A company that is set up as a distinct legal entity has the following capabilities:
- Enter into contracts
- Own property
- Start legal proceedings against another entity
Perpetual Succession
A corporation is an artificial juristic entity that is created via the legal process and can only be dissolved by the legal process. Unless it is dissolved through the legal process, a company has eternal and stable life. Since the word “perpetual” refers to something that is eternal or everlasting, the phrase “perpetual succession” in its broadest sense describes the existence of any company that is recognized by the 2013 Company Act.
Ease of Raising Capital
The enormous firm has expanded to its current size in part because it has developed creative methods for obtaining additional funding for future expansion. The top five ways for businesses to raise additional money are as follows:
Issuing bonds
A bond is a written commitment to make a predetermined payment of money at a future date or repeatedly during the length of a loan, with interest paid at a defined rate on predetermined dates. The bond can be sold to another party if the bondholder wants to get his money back before the note is due. The issuer guarantees to repay the principal at face value when the bond reaches “maturity.”
The corporation prefers bonds because they have cheaper interest rates than the majority of alternative borrowing options. Bond interest is another business expense that the firm can deduct from taxes. The drawback is that interest on bonds is typically paid even when no earnings are made. Because of this, a smaller firm rarely has much success issuing bonds to raise capital.
Sales of common stock
Bondholders have lent the company money, but they are not involved in decision-making or are entitled to a portion of the company’s gains or losses. The situation is quite the opposite for those who purchase common stock, also known as “equity” investors. The right to vote for the board of directors who run the business is typically one of their legal rights as shareholders who possess shares in the firm. However, they do not get dividends until bonds that are still outstanding have their interest paid.
A firm can raise money by voting to issue more shares of common stock if its financial situation is sound and it has enough assets. An investment banker consents to guarantee the acquisition of a new stock issuance from a large corporation at a predetermined price. The banker will accept them and suffer a loss if the market declines to purchase the issue at a minimal price. The basic value of each share is reduced when too much stock is issued, much like when paper money is printed.
Issuing preferred stock
There is a “preferred” dividend on this stock. In the event that earnings are restricted, preferred stockholders will get dividend payments ahead of common stockholders. According to the law, the holders of this stock are entitled to payment before the holders of bonds. When more capital is needed, a corporation may decide to issue new preferred shares.
Borrowing
Other means for businesses to raise short-term capital include borrowing from lending organizations, including banks, insurance companies, and savings and loan institutions. Working capital is typically used to finance inventories. The rate of interest on the loan, which is set by market competition, is payable by the borrower to the lender. The quantity of money in the total money supply that is available for loans can have an impact on the interest rate that a lender charges.
Due to the competition for cash when money is scarce, interest rates have a tendency to increase. The interest rate will often go down if there is a lot of money available for lending.
Using profits
Some businesses distribute the majority of their income to their stockholders in the form of dividends. Investors invest in these businesses because they desire a consistent stream of high revenue. However, some other businesses, sometimes referred to as “growth companies,” want to retain the majority of their profits and put them back into development and growth.
Owners of such stocks are happy to accept a lower dividend or none at all if the price of the shares rises quickly. These people would rather take the chance on a “capital gain,” or increase in stock value, than be guaranteed a consistent dividend.
The normal company prefers to maintain a balance between these different ways of funding growth, frequently investing roughly half of its earnings back into the company and paying out the other half as dividends. Investors may lose interest in the company if no dividends are provided.
Flexibility in Ownership and Management
All states have regulations that specify how a private limited company should be managed and who owns what, and they may seem a little stiff. Unfortunately, more people would become aware of how lenient these laws actually are if they studied their state’s laws.
Although some default laws may be unfavorable, most of them can be overcome by specific provisions included in the operating agreement, making the private limited company the most flexible entity available.
No management restrictions
When it comes to the management of the business, a private limited company can be managed by
- Its members: No matter their ownership proportion, all members of the business have an equal say in day-to-day operations when you choose member management for your private limited company (unless you state otherwise in the operating agreement).
They all share the same authority to bind the company to agreements and incur debt. Member management is most definitely not for you if you don’t want one of your members to have this level of authority.
- Separate managers: These people might or might not own stock in the business. When a company has more than two or three operating members, manager management is typically used. When choosing manager management, you can elect as many members as you like to serve as managers; however, if you don’t want all of them too, they are not required to do so.
Let’s take the scenario where you are raising capital for a new business. Despite the fact that you want your investors to gain from the company’s success, you don’t want them to be involved in day-to-day decisions. You create a manager-managed private limited company and choose yourself as the sole manager to do this.
The investors have a limited impact on how the company is run on a day-to-day basis because they are members without managerial authority. In order to prevent the investors from getting out of control on the set, this is a highly effective method for artistic enterprises like movies.
You specify in your articles of the organization when forming your private limited company whether it will be categorized as manager-managed or member-managed.
Credibility and Brand Value
Building brand credibility is one of the most important marketing objectives, and for good reason—using brand credibility strategies offers businesses a lot of benefits. A successful brand stands the test of time, recovering from setbacks and developing a more intimate connection with customers.
Benefits of Brand Credibility Tactics
Several significant business advantages are produced by brand credibility strategies, including:
- Shortens sales cycles
- Foster’s positive word-of-mouth and online recommendations
- Grows web traffic and generates leads
- Increases brand awareness among key audiences
- Aids in the recruiting process
- Generates media, analyst, and blogger interest
- Positions your company as a thought leader in your space
You rely on brand credibility strategies in today’s intensely competitive, always-on corporate climate to reach and sway your target markets. These strategies assist in spreading your core message across platforms and encourage customers to interact with and buy from your business.
Third-party investment options in a Private Limited Company
A private corporation cannot raise money by selling shares to the broader public, as was already mentioned. Only publicly traded corporations are allowed to do this. Instead, in order to raise money for the company, they can only take investments from other employees, family members, and friends.
As a result, money needs to be raised privately. A private limited corporation must have its members individually approached in order to be invested in. Third parties have three investment alternatives when looking to participate in a private limited company.
Debentures
Another risk-free way to participate in a private limited company is through debentures. Debentures can be divided into two categories:
Convertible debentures: With this kind of loan, the holder has the option to convert the debt into equity. It should be emphasized, though, that the majority of convertible debentures only generate mediocre returns.
Non-convertible debentures: The debenture in this instance cannot be changed from debt to equity. The returns are typically higher, though.
Investing in Loans and Advances
The simplest approach to investing in a private limited company with a typical return and complete principal security is through loans and advances. Regular interest payments would be made to the investment. There are several limitations on the kinds of borrowers that a private limited corporation may accept loans from, though.
Employee Benefits and Job Security
The perception of an employee’s capacity to keep their employees for as long as they can predict is known as “job security.” It is also an assurance that staff members feel that, even in the event of a financial catastrophe, they would continue to have secure employment.
Statutory and common employee benefits in India
Allowances and reimbursements
Some benefits are entirely taxable, while others are only subject to a limited amount of taxation.
Paid time off
In contrast to the majority of other nations, India’s leave rules are governed by the laws of the state in which the company’s legal entity is created, not the state in which the employee is employed.
In India, workers have the right to a certain kind of leaves known as “earned leave.” For private-sector employees, the minimum amount of earned leave is normally 15 days per year, though this varies by state. If an employee does not use their earned leave, they are allowed to roll it over to the following year.
Public holidays
Indian public holidays are typically regional rather than national. Only three national holidays are observed in the nation: Independence Day on August 15, Mahatma Gandhi’s birthday (Gandhi Jayanti) on October 2, and Republic Day on January 26.
Employers in India traditionally offer workers 10 days of paid holiday time to utilize whenever they like because each state observes its own set of holidays.
Maternity leave
India now mandates that all businesses in the nation offer maternity leave to their staff members. After working for the business for at least 80 days during the course of the previous 12 months, an employee is qualified for maternity leave.
Daycare provisions
Companies with 50 or more employees must provide daycare services at no cost to their returning employees from maternity leave. Daycare services can be offered on-site by employers, contracted out to a provider, or paid for by a fair stipend for employees. When new mothers work from home, they are not eligible for this benefit.
Private health insurance
India does offer public healthcare; however, the quality and accessibility vary greatly from region to region. Employers use private health insurance to entice the best personnel because the quality of public healthcare is sometimes far worse than that of private healthcare.
In India, private healthcare plans are not as expensive as they are in other countries. Employers have the option of offering a plan directly to employees or giving them a stipend to buy their own insurance.
Sick leave and casual leave
The national government of India ensures that workers receive at least 12 days of paid sick time (or unpaid time off) each year. In addition to covering employee diseases, this leave also includes time off for bereavement and caring for sick relatives. Employers are permitted to request a doctor’s letter when an employee takes sick leave for more than three days in a row.
Statutory social contributions in India
In India, employers are required to contribute a portion of each employee’s pay to the Employees’ Deposit Linked Insurance Scheme, the Employees’ Pension Scheme, and the Employees’ Provident Fund.
Confidentiality of Information
The following stipulates minimal requirements for the protection of proprietary or sensitive information by staff members of any private limited company:
Confidential and Proprietary Information
While working for the company, it’s possible for you to produce, acquire, learn about, or have access to proprietary or sensitive information. Confidential and proprietary information can be found in written form (on paper, in an email, on a diskette, on a videotape, etc.), as well as the knowledge that you overhear or learn from conversations in which you take part. Any system, data, or procedure that could offer the company an edge over its rivals is considered proprietary knowledge.
Employee Obligations Regarding Confidential Information
As a general rule, you should assume that any information you learn about the Company or its clients is private and ought to be kept that way. You have a duty to protect secret information, whether it was created internally or came from another source, and to use it exclusively to carry out your job duties. More specifically:
- You are not permitted to use confidential information for personal gain. You are not permitted to trade stocks for your own (or related) accounts or to counsel family members, friends, or other people on how to trade securities using confidential information.
- You are not permitted to reveal sensitive information to anybody outside the company while you are an employee or after you leave the company.
- Upon termination of your employment, you shall return to the company all tangible copies of confidential information, including electronic copies, and all other materials
embodied in any physical or electronic form that is based on derived from such information, without retaining any copies.
- Without the prior written consent of your former employer, you are not permitted to bring to the company any confidential information of any former employer or to utilize such information to further the company’s operations.
- You are not permitted to attempt to get confidential information that may be in the hands of other people or business units of the company and that you do not require for the performance of your duties.
Other employees may not receive confidential information from you unless there is an absolute need to know.
Basic Practices to Protect Confidentiality
The receiver has a genuine need for and is permitted to receive the information in accordance with his or her employment responsibilities, and it is not reasonably anticipated that the recipient will suffer any identifiable harm as a result of receiving the information.
Seeking Advice/Reporting Disclosures of Confidential Information
To avoid any potential issues, notify your general counsel or compliance officer right away if you think you or someone else has improperly received confidential information. Ask your general counsel or compliance officer for advice if you are unsure whether the information is confidential or not, and handle it as such.
Conclusion
The individuals who own shares in a private limited corporation are known as its shareholders. One person can own an entire firm and exercise complete control over all business-related decisions. If there are several shareholders, the voting power of each is based on the number of shares they each own. According to company law, if one shareholder owns more than 25% of the shares, they are considered “persons of significant interest” since they have the power to affect corporate decisions.
The benefits of a private limited company include the following: lowered personal liability risk, improved business profile, lower tax rates, simpler access to expansion funds, name protection for the company, flexible personal income, and corporate pension provision.
So, if you’re considering starting or growing a small business, you have a variety of legal options to consider, including sole proprietorship, business partnerships, public limited companies, and private limited companies. Before choosing your future business structure, consider the benefits and drawbacks of each option because there is no “one-size-fits-all” solution for small business owners. We truly hope that everyone who reads our blog and is considering forming a private limited company in the near future will find it helpful.
