When any individual thinks of starting up a business, the first question is the type of company they want to start. Whether it should be a private company or a public company, two kinds of companies have their pros and cons, but what’s better suited for a startup and which type of company will be more favourable to them in terms of profit-making is the real question.
The best option in terms of the availability of options, which seems most popular and preferable for start-ups, is private limited company registration.
This blog explores reasons why private limited company registration becomes ideal for India-based startups with its benefits, legal framework, and strategic advantage for scaling up and growth.
Introduction
Indian startups face stiff competition, and smart decisions determine the future of these ventures. One of the first big steps for entrepreneurs is choosing the right legal structure. This will be the private company registration.
The most suitable form for startups is considered to be a private limited company governed by the Companies Act of 2013. It combines flexibility, credibility, and growth potential to offer entrepreneurs the framework to operate professionally and attract investment.
What is a Private Limited Company?
The Companies Act 2013 defines a private limited company under section 2(68).
A private limited company is an organization which remains privately held by a set of people. The liability of the member is restricted up to their shares in the given company, but the share of this private limited company is not accessible for trading publicly.
The most common business structure among private limited companies in India can be established with two members and two directors for its registration, but a private limited company can go up to 200 members at a maximum. It is recommended to most of the professionally managed small and medium-sized businesses or family-run ones.
Why Private Limited Registration is the Best Choice?
Your legal structure of a business determines your tax rates, management & paperwork requirements, fundraising abilities & more.
Below are the points of consideration regarding why private Company registration is best for startups-
1. Separate Legal Entity and Perpetual Existence
A Pvt company has a perpetual succession, that is, the company enjoys continued or uninterrupted existence unless it is lawfully dissolved.
This existence is independent of the life span of its owners because it possesses a different legal identity. It may exist even in adverse cases such as death, resignation, retirement, removal, insolvency, or proven insanity of shareholders.
2. No Minimum Paid-up Capital
As per the Companies Act 2013, which has amended the paid-up capital, it is not mandatory for a private limited company. It may be registered with an authorized share capital of a small amount of Rs.1,00,000.
3. Limited Liability of Members
In a private company, the liability of the members of a company is limited only to the face value of the shares they take. That is why, in case of a winding-up of the company, if it is limited by shares, there can be no financial liability of the members beyond the unpaid portion of the shares.
4. Lower Income Tax
The low cost of legal and tax compliance is one of the most important advantages of a private limited company.
Private limited companies also have several privileges with regard to taxes. Such a company has a different tax rate, which could be less than the rate of individual income tax to the shareholders. Many tax deductions and exemptions are available to business enterprises to cut down the tax liability burden.
5. Attractive to Investors
Private Limited Companies are attractive to investors due to their excellent growth potential and historical track records of success in the Indian market. Moreover, a private limited company is a good name in both Indian and domestic markets, and it sounds more attractive to business owners who wish to be successful in their respective fields.
Some of the giant business brands, such as Parle, Google, Swiggy, and Flipkart, are all Private Limited Companies.
6. Low Minimal and Maximum Shareholder Limits
A private limited company in India can be started with just two shareholders, providing numerous benefits for smaller companies struggling to attract investors. However, incorporated companies can raise large investments in later stages and a maximum of 200 shareholders are allowed. This is very helpful in cases of local start-ups that must grow locally but have the intention to go global.
On the other hand, public limited companies require at least seven shareholders and have an indefinite maximum limit.
7. Free & Easy Transferability of Shares
Shares of the company limited by shares may be transferred by shareholders to any other person. Comparatively, it is relatively easier than transferring the interest in a business running like a proprietary concern or that of a partnership. Shares can be transferred simply by completing and signing a share transfer form and then delivering the shares and the share certificate to the buyer.
8. Fund Raising
A company can raise money more easily than a partnership firm or sole proprietorship. Venture capitalists & angel investors only make investments in public or private limited companies.
The Registration Process
The government in India has facilitated the ease of doing business for private limited companies. So here is a concise overview-
- Apply for Digital Signature Certificates of all directors.
- Apply for the Director Identification Numbers through the MCA portal.
- Get the company name reserved from the Ministry of Corporate Affairs, that is, MCA.
- Draft incorporation documents, comprising the Memorandum of Association and Articles of Association, are to be filed subsequently.
- Obtain the certificate of incorporation, which establishes the company legally.
The start-ups under the Startup India scheme can also register and avail themselves of benefits such as tax exemptions, funding support, etc.
Conclusion
Choosing the right business structure will significantly impact the ability of Indian startups to grow, attract investments, and operate efficiently; a private limited company has the perfect bottom because it gives credibility, the potential for growth, and limited liability protection to build a sustainable and scalable business.
The process of getting registered and then fulfilling all those compliance requirements poses a huge headache, but that long-term potential is definitely worth going through this burden. Startups choose private company structures so they are established brands with professional skills ready to survive the instability caused by competitors’ presence.
As the ecosystem of startups grows in India, the private limited company will always be the number one choice of entrepreneurs who want to execute their ideas successfully.
References
The Companies Act, 2013 (Act No. 18 of 2013)
https://www.mca.gov.in/
https://www.icsi.edu/home/
