It is important to consider the type of company you will form when forming your business. As such, choosing the appropriate form of company becomes a crucial decision. Among other types of companies you can form are pvt ltd company, Limited Liability Partnerships (LLPs), Sole Proprietors, and Public Companies.
In this article, we will discuss two types of companies, namely private limited companies and sole proprietorships, and why you should choose private limited companies over sole proprietorships. We will need to explain what these companies are and how they function before we can discuss why you should choose one or the other. This will help you make an informed decision about sole proprietorship to private limited company conversion.
An Independent Private Limited Company
The first question we need to ask is what a private limited company is. A private limited company is a business that is held privately, which means that the shares of the company are not traded publicly. In addition to being a powerful business vehicle, Private Limited Companies have many other characteristics.
Private Limited Companies have the following salient features.
- The minimum number of shareholders and directors required for a private limited company is 2 and the maximum number is 200, as well as the power to appoint up to 15 directors.
- In many cases, limited liability means that a director or shareholder can incur heavy losses without risking his or her personal assets. The risk is limited to the value of the shares owned by the director or shareholder.
- Continual Succession – The company continues to exist even after any of its directors die, become insolvent, or declare bankruptcy
- A Private Limited Company is a separate legal entity from its directors and shareholders, meaning that it is a body corporate.
- As opposed to many other types of companies, private companies do not have to maintain an index of their members.
The Sole Poprietorship
The sole proprietorship is a type of business where there is just one owner or entrepreneur doing business in order to earn a profit.
Here are a few salient features of sole proprietorships
- In a sole proprietorship, there is only one owner aiming to earn profits, and the registration procedure is very simple.
- The owner of a sole proprietorship has unlimited liability to cover the losses of the company from their personal assets.
- A proprietorship owner’s death affects the life of the business because perpetual succession is not permitted in proprietorships, and nobody can assume control of the business after his death.
- A sole proprietor is the sole bearer of profit and loss. Any business that earns profit or receives loss is the sole bearer of the profit or loss. He cannot shift the burden of loss to others.
The Advantages of Private Limited Companies Over Proprietorships
Here are some reasons why it will be a better choice for your business to use a private limited company after we have outlined the basic characteristics of both types of companies. Although proprietorships have the advantage of having fewer compliance requirements, the advantages of a private limited company easily outweigh the ease of compliance requirements of a proprietorship.
- A shareholder or director’s personal assets are not at risk in a private limited company, regardless of their shareholding. The personal assets of a director or shareholder cannot be acquired to clear debts of the company. In a proprietorship, the owner is responsible for unlimited damages
- The trading of shares in a private limited company is restricted, reducing the chances of a hostile takeover.
- Company succession- The company continues to exist after the departure of directors. In a proprietorship, no one can take over a company in case the trader dies, goes bankrupt, or becomes insolvent.
- Legal Entity- Private Limited companies are separate legal entities from their shareholders, which means they can sue, be sued, dispose of the company’s properties, and they will be judged separately from them. Any legal proceedings against the company are like those against the individual in a proprietorship, since the trader is one with the business.
- Private limited companies have many possibilities within the confines of the Income Tax Act, 1961, for reducing their tax burden and lowering their tax rates.
- Several exemptions for compliances and operations have been granted to Private Limited companies, which requires less maintenance.
Having no compliances and obligations as a sole trader in a proprietorship has many benefits. Nevertheless, private limited companies have a smooth operation structure and separate assets from their identities. Therefore, private limited companies are shown to be a better choice in the long run.