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Wrongly held Beliefs about Private Limited Company

Swati Jain 4 Stories

Friday November 04, 2016 , 4 min Read

Recently I was at my neighborhood friend’s engagement. His father has a chain of rice mills and is also involved in bottling of liquor. At the dinner table I had a talk with the groom and he was filled with a lot of misconceptions about private limited company. The most surprising dialogue was, “I asked my fiancé to leave her job because I feel that private sector isn’t safe for women”. Well safety depends on the company itself, not the private or government sector. He and his father both seemed quite reluctant about incorporating a private limited company. I would ask all sole proprietors and HUF to kindly consider the following points before making any judgments. These are some misconceptions I would like to address.

Too much compliance

Well, businesses need to comply with law of the land. Law doesn’t let you go if you are a sole proprietor and have ditched the law. Compliance can be a costly affair too, but it also saves you from legal clutches.

Number of Directors

Now you can even incorporate a company in your own name, as a One Person Company. It is better option than Sole Proprietorship. So now you don’t need to unnecessarily involve your distant relatives into your business as directors. After the new Companies Act, a ‘company’ isn’t an association of persons. Now it is an association of ‘person’ or ‘persons’.

Incorporation costs are high

In the upcoming points I would help you in figuring out the benefits of incorporating your business. Then you shall realize that incorporation is a lifetime investment. Professional’s in the area may demand you between 35,000 to 50,000 rupees. You can contact any Chartered Accountant or Company Secretary in this regard.

Taxes are high

This is the biggest misconception about doing business under the banner of a private company. All types of businesses are charged with the same rate of taxes, that is 30%. Over that a private limited company can claim additional tax benefits.

Auditing

Yes. A company must be audited and it can be quite lethargic job in the initial years, but in return credibility and goodwill matter more if you wish to do good business in the long run. If your sole proprietorship or partnership has an annual turnover of less than 1 crore, you can drop the idea of incorporation considering this part.

Benefits of being Pvt. Ltd.

Being a separate legal entity, it shall separate a company from its directors. That means, if the directors fail to meet their debts, their personal property cannot be subjected to repay it. It means your personal property shall remain risk free and separate from your business ventures.

Secondly, separate legal entity maximizes your leverage. Suppose you are currently a sole proprietorship, you are bound to the premises of your business under your own name. Now you have a limitation on owning land as per Land Ceiling Law of your state. Meanwhile, a company can buy a land in its own name and hence, you are free to acquire personal estates in your own name.

Perpetual succession of a company allows you to be tension free about any contingencies that may occur with your life. A company shall still be there, even after you.

In a company, you can build multi relationships. You can be the owner and a salaried employee, at the same time. This implies that you can always play safe drawing salary every month for your personal expenses.

Borrowing funds can be easier in a private company. You can issue debentures to the friends who help you in the hour of need. Financial institutions and banks also tend to support a company, as compared to a sole proprietorship.

Author: This blog is written by Mr. Amritanshu Tripathi, student of Shri Ramswaroop Memorial University, a passionate blogger & intern at Aapka Consultant.

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