Why starting a business as Private Limited Company is not a good idea | private limited company

Private Limited Company is an ideal Business entity for a majority of medium and large sized business, as it offers advantages from Liability protection to easy transferability. However operating as Private Limited Company is not ideal for Micro or small enterprises. Following are limitation associated with Private Company which makes it inappropriate for many businesses. Here is the list –

Expensive Incorporation:

Private Company registration costs more than LLP or proprietorship. More documentation required for incorporation of Private Company.

Limit on Maximum number of Shareholders:

To incorporate a private limited company, a minimum of two shareholders are required. A minimum of two shareholders and a maximum of up to 200 shareholders are allowed in a private limited company. The shareholders could be natural persons or companies, including foreign companies. There is no such limit on a maximum number of shareholder/members in case of proprietorship concern.

Minimum Capital Requirement:

To incorporate Private Limited Company minimum Rs. 1 Lacs and for Limited Company minimum Rs.5 Lac’s capital is required. So it is not suitable for small enterprises which are not capable of investing more money to start the business.

Compliance Formalities:

A private Company requires more compliances post incorporation. All companies are required to hold Board Meeting, Annual General Meeting, get the accounts audited, maintain statutorily. In addition to this, a Company would also have to maintain compliance with tax and labor laws, which are applicable irrespective of the type of business entity

MCA & Stock Exchanges’ Compliances & Penalty:

The company has to file Annual Return and Annual Report (XBRL format wherever applicable) yearly with MCA. Listed Company has to do quarterly compliance with Stock exchanges within stipulated time period. But if documents are not filed within stipulated time then there shall be huge penalty levied by ROC and Stock Exchanges.

Personal Liability.

The Company has unlimited liability. Members of the Company enjoy limited liability. However, in following cases personal liability of directors and members would also arise:

• When in any act or contract the name of Company has been misdescribed, those who have actually done the act or made the contract shall be personally liable for it.
• When in course of winding up of a Company, any business of the Company has been carried out to defraud the creditors, persons who are knowingly parties to such conduct shall be personally liable for the debts of the Company

Division of ownership:

A major disadvantage of the private limited company is that it requires a minimum Two directors and shareholders. So any single person cannot start a private Limited company. Hence any major decision to be taken by a Company would always require the consent of two persons.

Winding up of Company:

The procedure for winding up of a Company can be complicated, time-consuming and costly when compared to an unregistered partnership firm. Hence, it’s important to register a Company only when the promoters are serious about using the Company to operate a business.

Conclusion:.

It is better to incorporate LLP / proprietorship for the small scale of Business, where there is no need for more funds to run a business.