Your business’s future depends heavily on the type of company you form. It is therefore crucial that your company chooses the right type. The types of companies you can form include Limited Liability Partnerships (LLPs), Public Companies, Private Limited Companies, and Sole Proprietors. A sole proprietorship and a private limited company will be discussed in this article. Additionally, this post discusses why private limited companies are better than proprietorships.
Although, you should understand how private limited companies function before learning why they are better than proprietorships. Before you decide which company is right for you, you need to know their features and differences. You can make informed decisions for your company by reading about how these companies function.
What Is a Private Limited Company?
In order to decide what type of company you need, you must first understand what a Private Limited Company is. Companies that are owned and held privately are called Private Limited Companies. Private Limited Companies are private companies, which means that their shares cannot be traded in the general population. There are a lot of advantages to these types of companies, making them pretty popular and powerful.
Read the following list of essential features of a Private Limited Company for more details.
If there has been an increase in losses, the directors’ and shareholders’ personal assets are less at risk. Those shares whose value was boosted by certain shareholders and directors are the only ones at risk.
The minimum number of directors or shareholders required to form a Private Limited Company is two. Furthermore, your company can have only 200 shareholders or directors at once. Around 15 directors can be appointed by the company.
All Private Limited Companies are corporate. A body corporate usually means that the company is a separate legal entity and is not connected to the shareholders and the directors.
If any directors face bankruptcy, insolvency, or death, the company doesn’t die with them. In fact, the company will continue to live after this.
Most companies have to keep an index of their members carefully. However, a Private Limited Company does not have to keep an index of its members.
As you can guess from the name, a Sole Proprietorship is a type of company in which there is only one trader or owner who does business with the simple goal of earning profits.
Read the following essential features about a Sole Proprietorship.
- Unlimited Liability
Unlimited Liability suggests that the owners of any company with Sole Proprietorship have all the liability to cover the losses incurred by the company with their personal assets.
- Single owner
A Sole Proprietorship, as the name suggests, has a single owner whose only aim is to make profits. It is pretty easy to register for a Sole Proprietorship as it has far lower formalities.
- Single person who faces losses and gains profits
The individual who owns the Sole Proprietorship is the only one who incurs the loss and enjoys the profit. It is borne by the sole proprietor only. The sole proprietor can’t give the responsibility of dealing with the charges of losses to someone else.
- Company existence
A sole proprietor’s death severely impacts the life of this type of company. Once the sole proprietor passes away, the company cannot be taken over by anyone else. The company will die with the sole proprietor, so there can be no perpetual succession.
Reasons to Opt for a Private Limited Company Over Proprietorship
We can now look at the numerous reasons a Private Limited Company is better than a Sole Proprietorship after reading and thoroughly understanding the different features of a Sole Proprietorship. Since proprietorships have fewer compliance requirements than other types of businesses, they have a slight advantage. A Private Limited Company, however, offers numerous benefits that ultimately outweigh this disadvantage.
Here are the reasons why you should go for a Private Limited Company instead of a Sole Proprietorship.
- Reduced risk
There is a significantly lower risk of hostile takeovers for Private Limited Companies, as only five are permitted in a restricted way.
- Limited Liability
A great benefit of Private Limited Companies is that the risk of a shareholder’s or director’s personal assets is limited to the amount of their shares. Therefore, the companies’ debts cannot be paid by seizing the assets of the shareholders and directors. A Sole Proprietorship, however, entails unlimited liability for the owner.
- Separate Legal Entity
Companies that are limited by shares are corporate entities, as you know. The members are separate from the business and are not allowed to dispose of its property, to sue or be sued. Sole proprietorships, however, have the same owner as their company.
If the company is sued, the owner is automatically sued if any legal proceedings are filed against it.
- Perpetual succession
Despite the departure of directors for any reason, a Private Limited Company continues to exist. The company can continue to exist after the owner has passed away. A sole proprietorship, however, cannot be taken over by someone else if the owner dies, goes bankrupt, or faces insolvency.
There are many advantages to forming a private limited company over a sole proprietorship, including the fact that they require much less maintenance. Their operations and compliances have been exempted from numerous requirements.
- Tax Burden
Several privileges have been granted to Private Limited Companies under the Income Tax Act of 1961 to reduce their tax rates. You would be able to perform better and increase your company’s profits.