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7 Reasons to opt for a Private Limited Company

Lionel Charles
posted on 3rd July 2015
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Starting a business is one of the most interesting and rewarding experience of anyone’s life. One of the critical decisions made by the entrepreneur while starting this journey is the selection of his business entity. The choice of the business entity has long term implications for throughout the business’ life-cycle. Hence, it is important to discuss your business plan with a professional, and choose an entity that will support the vision of the business. In this article, we look at 7 Reasons you should opt for a Private Limited Company.

Build a Great Team

"Employees are a company's greatest asset - they're your competitive advantage. You want to attract and retain the best; provide them with encouragement, stimulus, and make them feel that they are an integral part of the company's mission." - Anne M. Mulcahy

Great businesses are a product of great teams. Success in business is no longer determined by the capabilities of one person. Success in business is now determined by having the ability to quickly build great teams.

PRIVATE

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Today, high performing employees are looking for more things than just a high salary. Therefore, to attract and retain good talent, businesses are offering a number of benefits like stock ownership, flex-time and training. Of the benefits provided, stock ownership is one of the most valued among prospective hires or existing employees. Employees who have stock ownership or ESOPs feel they are a part of the business, and it helps improve morale, retention and profits.

Therefore, it is important for any business today to have the option of providing stock ownership or ESOPs to employees. Only private limited companies and limited companies can offer stock ownership and ESOP plans.

Attract Funding

“An entrepreneur without funding is a musician without an instrument.” -Robert A. Rice Jr.

Funding is essential for starting, maintaining, and growing a business. A business can be self-funded, funded by friends and family, or by debt or equity. Growing a business today requires all four types of funding. Proprietorships, partnership firms, and Limited Liability Partnerships cannot issue shares, and are thereby unable to attract equity funding. This disadvantage could be critical in the growth stages of a business, wherein the business requires equity capital from sources like friends, family, angel investors or private equity firms to grow quickly.

Today small businesses are being out-competed by larger businesses. Hence, it is essential for all businesses to grow quickly, and have the ability to attract funding from any source.  Thus, a private limited company is the ideal type of business entity for growing businesses.

Limit the Risk to Personal Assets

"Do not leave yourself or your family unprotected against financial storms... Build up savings."

- Ezra Taft Benson 

Profit and loss are a part of a business. Therefore, it is important to be protected against losses, to protect our near and dear ones in case of financial difficulties. If a business owner has "limited liability" protection, it means that only the assets of the business are at risk, and not the promoter’s personal assets such as personal bank accounts, cars and houses.

Therefore, it is important to register an entity that provides limited liability protection to its shareholders, such as a private limited company, a one person company, a limited company, or a limited liability partnership.

Improve Business Credibility

"If people like you they will listen to you but if they TRUST you they will BUY from you."- Zig Ziglar

Today customers, vendors and investors look for credibility in the businesses they deal with. If a business is started as a proprietorship or partnership firm, the business is not registered with the Ministry of Corporate Affairs and cannot be located in the online company or LLP databases. Oftentimes, there is no credible proof of the business’ existence, making it hard to open a bank account, acquire reputed customers, or obtain credit from vendors.

In starting a private limited company, the information relating to the company, such as name of the company, date of incorporation, registered office address, status of the company, and other information are made available in a publicly searchable database. This feature makes it easy to authenticate the existence of the business, improving business credibility.

Pursue Multiple Opportunities

"Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion-dollar companies. If success was mostly a matter of luck, these types of serial entrepreneurs probably wouldn’t exist.”

Successful entrepreneurs are often serial entrepreneurs, who go on to repeat the success they have in one business in multiple other ventures. They are also good at spotting opportunities early on and quickly move to exploit it. Virgin Group’s Richard Branson has reminisced about how he and his friends, when running a student magazine at the age of 16, noticed that the readers were interested in music, and started a mail-order record business. They ran ads in their magazine to promote it. The two businesses complemented each other well and developed synergies. Today the Virgin Group operates hundreds of companies over a range of industries.

Businesses started as a proprietorship or partnership would have trouble pursuing many opportunities that come their way, as they are not considered separate legal entities and are tied to the promoter. Starting a private limited company, on the other hand, would allow the promoter to pursue multiple opportunities as the business evolves over time.

An Exit Plan

“Exits are the best part of being an entrepreneur or investor. It is when we get financially rewarded for all of the creativity, hard work, investment and risk we put into our companies.” - Basil Peters

Most entrepreneurs, while launching their businesses, only think about expanding their businesses, and never have an exit plan. An exit plan is essential for every business to capitalize, and for entrepreneurs to get rewarded for all their hard work. Further, the entity choice made at the start of the business, without any consideration for an exit plan, could have huge implications down the road.

Private limited companies offer the best type of exit strategy for all promoters. Only shares of a company can be sold or transferred in part or whole to another entity easily without any hassles, while the business remains a going concern. Therefore, starting a private limited company provides a tremendous edge in planning and executing a business exit plan.

Going International

"With over 1 billion users and counting worldwide, the Internet has quickly become a critical place for individuals, business communities and governments to share and distribute information." -Robin Hayes

The internet has made the world a smaller place. Gone are the days when Indian companies would develop products for foreign businesses. Today, Indian startups are developing products that compete on a global scale, and Indian businesses are started with aspirations to becoming multinational corporations. Investments from and collaborations with foreign businesses play an important role in the journey to becoming a multinational corporation.

Private limited companies and limited companies are the only types of entities that allow for Foreign Direct Investment of upto 100% through the automatic route, meaning, any foreign entity or foreign person can invest in a company without any prior government approval. Entities like proprietorship, partnership and limited liability partnership require prior approval from the Government to accept investments from foreign entities. Therefore, if your business has aspirations for going international, then it is best to start a private limited company.

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