Private Limited Companies

Private Limited Company is the most preferred structure for businesses that plan to grow big, get investments by way of equity, wish to offer sharing of ownership with employees by way of ESOP, wish to get FDI, etc.

Advantages of Private Limited Company:

Private Limited is a Separate Legal Entity, district from its directors and shareholders. Private Limited is considered as a separate legal person, and the directors only represent such legal persons in their capacity as directors.

Pvt Ltd can sue and be sued on its own name. Pvt Ltd company continues to exist, even though there is a change of directors and shareholders.

Private Limited Structure allows the segregation of Management from the ownership. Directors are responsible for running the company and Shareholders are the owners of the company. Shareholder have the right to appoint the directors.

Directors run day to day management of the company and go back to shareholder for approval for major decisions.

This segregation of management from ownership is the major factor due to which private equity investors prefer Pvt Ltd structure for investment, as they can invest their funds and leave the management to be run by the promoters.

Pvt Ltd as the name indicates has the feature of limited liability, which means that liability of the company does not extend to the personal assets of the promoter or directors. The loan and liabilities of the company can be recovered only from the assets of the company.

This feature of Pvt Ltd company allows the promoters to take a risk that is required to be taken to pursue business growth without carrying the risk of losing the personal assets.

In case of a partnership, profit after taxes is free for distribution among the partners, and distributed profits are exempt from taxes in the hands of partners. This is unlike in the case of Pvt Ltd Company where profit distributed in the form of dividends is taxable in the hands of recipients.

Shares held in Pvt ltd company can be transferred by the investor to another person, which need not affect the business of the company, this way Pvt ltd structure offers exit option for an investor in the business.

Secondly, the Pvt ltd structure allows shares to be allotted to the employees, by way of ESOP, Sweat Equity, etc, thereby giving scope for sharing of business ownership with employees.

With recent amendments to the tax laws, profits of the Pvt Ltd company are taxable at a lower rate as compared to the tax rate applicable to the LLPs or Partnership firms.

Pvt Ltd structure attracts more compliance burden as compared to other structures like LLP or Partnership firms. Appointment of Auditors, Audit of accounts, filing of annual accounts, filing of Annual returns, preparation of financials in the prescribed format, holding of a Board meeting and meeting of the shareholder is required to have complied with irrespective of the volume of business of the company.

Investment of funds in the company by way of debt is subject to restrictions. Funds can be borrowed only from directors, shareholders (subject restriction on the amount of loan) and companies. Whereas no such restrictions are applicable for LLPs or Partnership firms. Also, profit after tax is not free from distribution among the shareholders, they are again taxable in the hands of the shareholder as dividends.