In India, a common scenario to get started a business is to either have a proprietorship or partnership business. Every proprietorship and partnership business in India, at some point of time, considers whether or not to incorporate their business as a private or public limited company.
If you are considering incorporating a private or public limited company then this article might help you to know why to incorporate a private or public limited company in India, it’s advantages and disadvantages.
One of the main reasons to incorporate a business as private or public limited company in India is to have a separate legal status and due to some disadvantages of proprietorship and partnership form of business.
Operating a private or public limited company has its own drawbacks and advantages. First let use look into the advantages and then we will move to disadvantages part.
Life of the organization
Life of a proprietorship and partnership business is limited. Private and public limited companies have unlimited life span i.e. it will not cease to exist on the death of a shareholder or shareholders.
By incorporating a private or public limited company, you have created a separate artificial person thereby making the business separate from shareholders or owners. After incorporation it will never cease irrespective of the death of shareholders or owners unless directors and shareholders have decided to dissolve the company.
In today’s competitive market to distinguish yourself from others, you need to build credibility among your existing and probable customers. By incorporating a private or public limited company, your business builds credibility and proves legitimacy to customers and creditors.
No Personal liability
By incorporating a company you are limiting your personal liability to the extent of the money that is invested in the company’s share capital. Limiting personal liability means, by protecting your home or other personal assets from being seized due to company’s liability at a difficult situation.
In proprietorship business, all the liability of the business is assumed as owner’s personal liability and gets recovered by selling personal assets like house, car. Similarly, for partnership business, it gets recovered on the basis of profit sharing ration from each partner’s personal assets.
After incorporation, as an owner or shareholder, your liability is limited to the amount that is invested in the company. Personal assets cannot be seized to pay debts of your business unless owner or shareholder has given a personal guarantee.
Easier to transfer business or ownership
A private or public limited company incorporated in India has its own asset and liabilities. It’s maintained regularly and filed with ROC as per Indian Companies Act. While transferring the business, it will be easier for the buyer and seller to find out the actual price of business as everything in already accounted and reported.
Company’s ownership interest can be readily sold or transferred to another interested party without touching the asset or liability of the company. But, in case of proprietorship or partnership business each property of the proprietor or partnership business has to be retitled in the name of legal heir.
While taking a decision on whether to incorporate a private or public limited company in India or not, you are also required to look at the disadvantages part.
Disadvantages of a private or public limited company
In comparison to proprietorship and partnership business, paperwork will be increased drastically as the company is a separate legal entity and for each and every change, board of directors are required to file various forms with registrar of companies. It’s also required to have mandatory books of accounts as per Companies Act 2013.
In case of sole proprietorship business, you are not required to file a separate income tax return for you business. But after incorporation, another income tax return in form ITR6 for the business of private or public limited company has to be filed with the department in addition to the individual return that you use to file before.
Last and the most important disadvantage is COST. Before incorporation, you need to get yourself prepared to take registration cost, professional charges, yearly audit fees and other legal expenses into consideration while doing business as a company.
We have now discussed advantages and disadvantages of incorporating a private or public limited company. Before taking a decision on whether to or not to incorporate a company, we suggest you to consult your accountant on this issue and then take a decision accordingly.