Facts And Myths About Private Limited Companies

Facts And Myths About Private Limited Companies

Starting a new business is an overwhelming process. The entrepreneur needs to make decisions about a lot of things. The structure of the business, its legal identity, preparedness for future growth and various other factors play a crucial role in its success. It is important to consider all such factors to eliminate risks and pit falls involved. While a Private Limited Company offers a wide range of benefits to businesses, there are many misconceptions that surround this entity. But fear not, we have compiled this list to help dispel any myths or misconceptions you may have which are putting you off from registering a Private Limited Company.

Anyone can register a Private Limited Company

This is true in most cases. However, there are some restrictions in Companies Act, 2013 with regards to who can be a director.

Single person cannot hold 100% shares in a Private Limited Company

After April 2014, a single person can register a One person company (OPC) as a Private Limited business and can own 100% shares of the Company.

Any Company name can be used

There is a degree of freedom when you're choosing your name, however, there are certain rules and restrictions that require to be taken into consideration. Also, you cannot register a name that is similar to an existing company name or registered trademarks. At MyEfilings, we check the name and ensure name selected complies with the requirements.

Private Limited Companies can be registered at only Commercial Places

Many entrepreneurs think that Private Limited Companies can't be registered in residential or rented premises, which is not the fact. At the registered office address of the company you can show your own residential or rented home address. Provided that Company should paint or affix its name and the address of its registered office, in legible letters outside of every office or place in which its business is carried on.

A Venture must have a certain level of Turnover or Sales to register a Private Limited Company

This is not true, a Private Limited Company can be established from the scratch. For that matter, even after incorporating a Private Limited Company, there is no obligation that the venture must have sales or turnover.

It is time consuming and expensive to register and maintain a Private Limited Company

Quite the contrary. Incorporating a Private Limited Company takes less than three working days if all the documents are in place. Also there was a belief that incorporating a Private Limited Company is an extremely expensive affair due to the paid-up capital requirement of Rs.1 lakh. That requirement is no longer applicable making the process of company incorporation cost-efficient too. Naturally, there may be ongoing costs involved in running a Company. The scale of these will depend on the type of business. Further, MyEfilings can help you to get your Private Limited Company registered at best price in a hassle free manner.

Directors of the Company must hold shares in the Company

Shareholders invest in the Company while director directs, control or manages the affairs of the Company. In most of the Private Limited Companies, directors and shareholders are the same person. However, it is not mandatory for every director to hold shares in the Company.

After Incorporation, changes in Private Limited Companies are tough

Again this is not the reality. Private Limited Company is one of the most flexible business structures available for startups/entrepreneurs .Even after incorporation; you can change its capital, shareholding, directorship, business scope, office address etc as and when required in accordance with law.

Shareholders and Directors meetings are required at regular intervals

Yes, at least 4 board meetings should be held in every year with a gap of not more than 120 days between two meetings. Every Private Limited Company is also required to hold an Annual General Meeting every year. Even an Extra Ordinary General Meeting can be convened to meet and deal with urgent matters that arise in between the annual shareholders meetings.
All the above meetings are related to business only and can be done in regular course of business. Meetings pertaining to the maintenance of legal compliances of a Private Limited Company is not a tedious or hefty task to perform. Hence, whether it is Board Meeting/ Annual General Meeting/ Extra Ordinary General Meeting, it should not come in the way of choosing a Private Limited Company as a form of doing business.

A Private Limited Company is not ideal for Startups

On the contrary, the structure of a private limited company is beneficial for startups. While this myth probably originated due to higher compliance requirements and costs, the features of a private limited company are better suited to startups since they make the business more sustainable. Also, investors prefer this business structure over a proprietorship or partnership to offer seed funding.

Private Limited Companies cannot be shareholders or invest in another Private Limited Company

A Company is considered as an “artificial person”. So, once incorporated, it can invest in the shares of another Private Limited Company.

Transferring shares and selling the Private Limited Company is difficult

Inspite of some limitations on the transfer of shares in a Private Limited Company as per the Articles, the securities of a Company are freely transferable; making it easier to subscribe, transfer the ownership of the company or leave the Company.

The value of the Company could be easily found out through the shares and the book of accounts and because personal assets of the owners are separate there is no confusion about division of cash as everyone will receive the quantity as per the shares they hold.

Comparatively, it becomes easy to sell the business if it is registered as a Private Limited Company because its credibility is higher than the other form of business structure.

Its costly to maintain an in-house legal team to comply with the laws

This is not the truth, Private Limited start-ups requires very minimal compliances of annual roc filings, accounting and tax filings. We can help you with these services at a nominal cost. We take care of all of your compliance requirements so that you can focus on your business growth.

Conclusion

The choice of business structure plays an important role in determining its future. You must ensure that you consider all aspects of your business before making this decision. Like other business structures, a Private Limited Company has certain pros and cons too but it provides more security and surety than any other structure. It is organized and has an ability to attract investors, get bank loans and raise funds as its credibility is higher than the other structures. Hence one should not turn a blind eye to this structure because of certain myths and compliances surrounding it and make an informed decision before finalizing the business structure for company incorporation.

Written By: CS Mansi Nagda

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