Reasons Why a Private Limited Company is Beneficial

Private Ltd is an attractive business model for start-ups as private limited companies transfer limited financial liability on the members of the company as compared to other businesses such as sole proprietorship. Additionally, a private company get Tax advantages easy expansion and fundraising.

According to the Companies Act 2013, the Articles of Association have the following terms and conditions:

  • Articles of Association of a private limited company do not allow the company to transfer its shares to anybody who is not a part of the company.
  • They also limit the number of members of a private limited company to two hundred which does not include the employee members whether they are present employees or were past employees of the private limited company at any given point of time.
  • The Articles of Association of a private limited company do not permit any requests to the public to subscribe for any securities owned by the company. No member of a private limited company can under any circumstances transfer his/her shares to any person outside of the company, nor can he/she invite any person to own stock in the company. Any such act for a private limited company is illegal under the Companies Act 2013.

Advantages of a Private Limited Company

Most companies in India are incorporated as private limited companies:

1. Closely held:

As all the stock of Private Company is concentrated in the hands of a few individuals, it mitigates the risk of intrusion of an unknown. Even the shareholders are restricted to some extent from selling the stakes of the company to a person who is not a member of the company, without offering them to existing shareholders or members.

2. Limited Liability:

A Private limited company is an independently taxed and responsible business entity, where each shareholder has liability limited to his or her shareholding only.

3. Separate Entity:

As per the terms of the contract the private limited company enjoys the status of a legal entity and in this capacity it can own property and enter into legal contracts. Also, the members of a company are not liable for the company's debts to its creditors.

4. Legally Assessed:

Being a separate legal entity, the company can precede a legal suit in the court of law in its name. At the same time, it can be sued in a court of law by any other legal entity.

5. True Owner:

A company is a juristic person and its actual owner. No member of a company can claim the properties owned by the company as its own as long as it is a going concern. Although if the company is dissolved the assets are to be distributed amongst the shareholders after the creditors of the company are paid off.

6. High Value:

A private limited company hold high credibility in the national and international market and hence most foreign companies incorporated in India are private limited companies. This is because they receive financial help easily as compared to other types of companies formed.

7. Related Party Transactions:

Private limited companies enjoy more relaxations over compared to public limited companies in related party transactions as most of the deals in private limited company is within the close network of directors or promoters.

8. Expansion:

In Private companies, the scope of development is easy as the fundraising can easily be done by receiving funds from its members, directors only. The bank also gives high value to private companies and sanction Loans accordingly.

9. Directorship of a Private Limited Company

The directorship of a private limited company that is either a holding or subsidiary company of a public company will not be included in determining the maximum number of directorships that person can hold in public companies which are restricted to 10. 

A private limited company can be granted an exemption from the constitution of a Nomination and Remuneration Committee. The Companies Act has exempted a private limited company from forming a constitution of a Stakeholders Relationship Committee. This is not possible in the case of a public limited company.

The exemption saves the charges of maintaining such committees and this money can be invested further in the business.

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