Private Limited Companies: A path to success for startups

The Exciting World of Startups

Startups can be a place of high intensity. The chaotic and intense workload, being on the cusp of innovation and the stress of getting and pleasing clients. It can be a challenging task to deal with all the pressure that comes with startups. This tension and pressure can be relieved by choosing the right path and foundation for the company.  This will ensure the company goes in the right direction. In this article, we’re going to look at choosing to go Private limited Company with your startups and how private Limited companies are startup friendly.

Private Limited Companies are startup friendly

Great! You have an idea for an innovative solution to society’s problem or you have automated a manual procedure this does not ensure success or any rewards for startups as such. What does bring success to startups is steering it gently and carefully in the right direction and complying with market demands. One step towards defining the direction of the company is choosing what type of company you are going to form. Companies are of various types and selecting the right model for your startup is as important as any other procedure.

So what is a company? we must ask first! In India, according to the Companies Act, 2013, A company is an association of individuals who register their company under the regulations of the act and agree to comply with regulations set for a company

 Let’s look at various Types of companies you can form in India.

• Sole Proprietorship – Suitable for small traders
• Limited Liability Partnership(LLP) – Suitable for firms wanting to inculcate a partnership structure
• One Person Company: Individuals Starting their own company.
• Private Limited Company– Ideal for startups, firms wanting to go public, inviting VCs and FDI and therefore, Good for growth

Private Limited Company registration has a lot of merits for startups. For starters, Private Limited Companies have a greater applicability in the market and are a large community in the country with over 1 crore Pvt Ltd Companies in operation in the country. Private Limited companies also have faster processing of legal procedures.

In addition to this, the Private Limited Companies have limited liability. Limited Liability means that the risks to the personal assets of a founder/ director are minimized in this company structure.

Here’s listing down some of the advantages of Private Limited Companies over LLP Registration.

• Private Limited Companies define a clear distinction between shareholders and directors of a company whereas LLPs provide no clarification on these roles.
• The potential for raising venture capital and offering options for attracting great talent by offering ESOPs (Employee Stock Option Plans) is available for Private Limited Companies. However, no such option is available for LLPs
• The time for the incorporation process is generally faster for Private Limited Company(7-10 days) compared to LLPs(15-20 days)
• LLPs also have a higher fine rate for late filing of documents as compared to Private Limited Companies.
• Private Limited Companies have the provision for perpetual succession that is company continues to function as normal after death/ leaving of a director. LLP, on the other hand, has no provision of perpetual succession. Director(s) have to dissolve the LLP if any of the said events occur. PLCs have Flexibility on ownership and sharing of ownership.
• LLPs cannot retain profit in the same way as a company limited by shares. LLPs cannot issue shares at all and therefore, growth and expansion scope is very limited whereas inviting Private Limited Companies can raise humungous amounts of capital for their further growth.
• A Private Limited Company(PLC) has provisions for various tax deductions.LLPs will have to pay Income tax whereas private limited companies have to pay corporation tax. There are many provisions in place for tax deductions on corporation tax.
• Even though PLCs have higher compliances and audit procedures these ensure the company stays in compliance with the regulations. LLPs if they have a higher than 40 lakh Rupees turnover, are subject to the same compliance requirements. Hence, constant auditing proves beneficial in this situation. Prepares the PLC for further more intensive auditing procedures.
• Exemptions: The Private Limited Companies are entitled to many exemptions for compliances as well as other operations as per the Companies Act, 2013.  Read about: Exemptions Private Limited Companies

Incorporating a Private Limited Company

The Ministry of Corporate Affairs has taken drastic steps to ensure faster processing of company registration.  Recently the government introduced the measure of One Day Company Incorporation.

 

Let’s list down the basic steps of incorporating a private limited company.

• Obtain DSC(Digital Signature Certificate)
• Apply for name Approval of the company
• File e-form INC-32 (SPICe) along with e-MoA(INC-33) and e-AoA(INC-34)

The SPICe integrated e-form now has provision for the following:

• Obtaining DIN(Director Identification Number)
• Name Reservation
• PAN and TAN number
• Incorporation Certificate

You can look at FAQs Private Limited Companies to get an in-depth knowledge of registering a private limited company in India.

Conclusion

In conclusion, we are trying to push through the notion that a startup in its early phase is almost always in a fragile state. It becomes vital for companies to pick and choose what type of company they are going to be in the future. This article gives a slight hint that going with Private Limited Company Registration might the most suitable for startups and is, therefore, one of the key business vehicles to ensure long-term success.