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Top Reasons to Incorporate a Private Limited Company

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Last Updated on June 22, 2024 by Kanakkupillai

The procedure of legally creating a corporation or other corporate body is called incorporating a private limited company. Limited liability, transferable shares, permanent succession, separate property, the power to sue, flexibility, and autonomy are benefits of incorporation for a firm.

Reasons to Incorporate a Private Limited Company

1) Limited liability protection

  • Explanation of limited liability: Each shareholder or member’s responsibility in a private limited company is constrained. The shareholders are, therefore, required to sell their assets to make up for any loss, regardless of the reasons.
  • Shielding personal assets: Private limited company shareholders are protected from having their assets seized to settle their obligations because they are only responsible for the amount they invested in the company.
  • Minimizing financial risk: The business owner might avoid being held personally accountable for the debts and other liabilities of the company by limiting their liability by switching to a private company.

2) Separate legal entity

Legal distinctiveness of a private company: A private company is a privately held company that individual investors own. In this situation, the shareholders’ responsibility is restricted to the number of shares they own under the limited partnership liability arrangement.

Ownership and management structure: A private limited company is an organization that is owned exclusively by individual shareholders. In this situation, there is a limited partnership system of responsibility, and each shareholder’s obligation is restricted to the amount of shares they own. Their organizational structure significantly impacts the performance and sustainability of private companies.

The organizational structure of a private company

Here is a list of a private limited companies organizational structure in hierarchical order:

  • The managing director
  • Chief executive officer
  • Chief operating officer
  • Operations Manager
  • Chief financial officer
  • Finance manager
  • Chief technology officer
  • Technology manager
  • Chief legal officer
  • Legal managers
  • Chief marketing officer
  • Marketing managers

Role of Subordinates in the company hierarchy

Employees who report to bosses are referred to as subordinates. They assist the management in carrying out and putting into practice various strategies and policies.

They also carry out the bosses’ established work strategies.

Continuity of existence

The continuity-of-life theory, sometimes known as the continuity-of-existence doctrine, is the idea that an entity’s existence, particularly that of a corporation, is not terminated by its owner’s withdrawal, incapacity, bankruptcy, or death.

3) Tax advantages

Salary to the founders or directors

  1. Directors of a corporation take a predetermined percentage of the profits as their own.
  2. Instead of paying a dividend, the gains can be transferred to the director as a salary to save on taxes.

Sitting fees to directors

Companies may pay directors’ sitting fees for attending committee or board meetings.

Pay advance tax

  1. Advance tax, sometimes called the pay-as-you-earn system, is a tax that you predict your turnover and pay in advance.
  2. By paying advance tax on time, you can avoid paying late fees on taxes paid at the end of the fiscal year.

Rent expenses

You can deduct this expense and receive a tax break if one of your company’s directors or a family member is named as the registered office.

Capitalizing on capital assets and depreciation

You must profit from an asset if it helps your firm and generates income.

Salary to a family member

  1. Family members offer free advice and assistance to enterprises
  2. You can enter their salary in the accounting books. Bring your earnings portion home with dual tax incentives to reduce your taxes.

Entertainment expenses

The company hosts a dinner or an internal party for family members or partners roughly every three months following significant successes.

Dividend distribution

Dividends might be interim or final. The interim dividend is paid during the fiscal year, while the final dividend is given at the end of the year. Declaring and distributing dividends to shareholders of private limited businesses is governed by the Companies Act, 2013, passed in 2013.

4) Access to funding

Raising capital through equity 

Generally speaking, the process of raising private equity money can be divided into three stages:

  1. Proffering (before approaching investors)
  2. Offering (liaising with investors)
  3. Closing (securing partnership with investors)

Through loans and debentures

Directors and family members may offer a corporation an interest-free or interest-bearing unsecured loan. Additionally typical is the practice of bank borrowing. On the other hand, these funds are raised over a predetermined long-term period at a fixed interest rate. The board must adopt a resolution before borrowing funds from any bank.

Through angel investors

High-net-worth individuals who lend money to startups in exchange for stock in the company are known as angel investors. Since most angel investors are private equity specialists, a company seeking funding must have current financial documents, a business plan, and a workable exit strategy. Angel investors often only work with businesses that have a strong likelihood of experiencing exponential growth and that want to go public shortly.

Enhanced business credibility

According to research on credibility, people make three unconscious judgments about a person’s trustworthiness: ability, character, and care. All three of these qualities are found in the top private companies.

5) Perpetual succession

Independent existence from founders 

This phrase refers to the fact that a business usually “lives” independently of its founder(s), stockholders, and staff. In other words, the business entity will continue to exist even if some employees leave, retire, or even pass away.

6) Professional image and trustworthiness

Building customer confidence 

Strategies to retain customers’ trust

  • Be upfront and truthful with everything (e.g., pricing, product revisions, etc.).
  • Highlight the basic principles of your company.
  • Keep staff members informed.
  • Attend to the concerns and inquiries of your clients.
  • Admit your errors and grow from them.
  • Make communication a priority.
  • Encourage everyone to provide feedback.

Attracting investors and partners 

  • Outline a detailed plan for finance.
  • Speak to the proper investors.
  • Make use of your network.
  • Present investment packages with fast payouts.
  • Emphasize the organization’s main goal.

Competing with established businesses

  • Create a strong online identity for your small business.
  • Examine current marketing trends.
  • Establish a solid business reputation.
  • Provide first-rate customer service.
  • Improve products based on client feedback.
  • Identify and hone your target audience segments.

7) Compliance requirements

Meeting legal obligations 

A statutory audit is required to ensure the representation of the financial condition is accurate. Examining data, including bank balances, bookkeeping records, and financial transactions, is a part of the statutory audit. A Pvt Ltd company must engage statutory auditors to identify annual account errors.

  • Private limited company compliance is required.
  • A board of directors meeting.
  • The issuance of stock certificates.
  • The hiring of auditors.
  • Minutes of the board and general meetings’ proceedings.
  • Directors are disclosing their financial interests.

Enhanced corporate governance 

Although there is no proven link between corporate governance and a company’s market worth, it does increase shareholder happiness. Because maximizing the interests of all stakeholders is the ultimate goal of effective corporate governance in India, it is crucial to protect a company’s valuation.

Financial transparency

As the name suggests, a private limited company is not compelled to reveal financial information to the public. Family-run enterprises, sole proprietorships, and most small and medium-sized firms are examples of privately owned businesses.

8) Employee benefits and growth

Offering employee stock options 

Employees can purchase business shares at a price with an employee stock ownership plan (ESOP). It is NOT a must. As a result, the employee need not exercise the right to purchase company shares if the value of the shares is less than the option excise price.

ESOPs may be issued by a private limited company, but if an employee also serves as a director, a 10% restriction must apply.

Attracting and retaining talent 

Being able to hire and keep employees while keeping turnover manageable is the capacity to attract staff. A charismatic boss is adept at finding and appointing talented workers. They can also retain these workers for a long time. An effective leader typically has little staff turnover.

Conclusion

You can contact Chennai-based Kanakkupillai.com, the Govche India Pvt. Ltd. web portal, if you want to incorporate your private limited company for the straightforward reasons we’ve covered in this blog post. With Kanakkupillai, registering a private limited company is simple and may be done online in three quick steps:

  • They can help you with the Ministry of Corporate Affairs’ requirement that all businesses have registered directors.
  • Select a name for your business. (Use their database to look up a company name, or contact them for assistance.)
  • The experts at Kanakkupillai.com prepare and submit the paperwork (Memorandum of Association and Articles of Association) necessary to incorporate your business.

Kanakkupillai

Kanakkupillai is your reliable partner for every step of your business journey in India. We offer reasonable and expert assistance to ensure legal compliance, covering business registration, tax compliance, accounting and bookkeeping, and intellectual property protection. Let us help you navigate the complex legal and regulatory requirements so you can focus on growing your business. Contact us today to learn more.