Common Myths About Private Limited Company

One of the preferred forms of organizing a business structure in India would be a private limited company. Entrepreneurs-in-the-making love to form Private Limited Companies owing to their widespread usage by newer companies and expanding small and medium-sized enterprises. Notwithstanding its utility, several beliefs regarding private companies deter entrepreneurs from going for private limited companies: myths of costing more, mistaken compliance, and the list goes on.

This blog post aims to remove the common myths about private limited companies in India and establish facts. This is because addressing such myths will enable entrepreneurs to make well-informed decisions regarding the structuring of their business and make the most out of a private limited company.

Introduction

Private limited companies have become the favourite business form in India because of their flexibility, protection against liabilities, and ability to attract investors. The Companies Act 2013 provides a flexible form of operation while keeping stakeholders on their toes.

However, myths concerning private limited companies create hesitation among entrepreneurs. High costs, complex regulations, and lack of control are some misconceptions based on which one does not explore the highly beneficial structure.

Myths About Private Limited Company

1. Registration of a Private Limited Company is Costly

The Myth- Many people have the notion that forming a private limited company demands much capital and also has an incorporation cost which is very costly. This fact makes small entrepreneurs afraid to embrace this form.

The Reality- The costs of registering a private limited company are much less compared to how many people consider.

Low Minimum Capital- No minimum capital under the Companies Act 2013 exists. A firm can begin operations with as low as Rs 1 paid-up capital.

Affordable Government Fees- Registration charges are calculated on the authorized capital, although they might not be too expensive. Most state government entities have package deals to encourage small businesses.

Professional Help- Getting professionals to help with incorporation comes at some cost, but their efficiency ensures that the process goes off without a hitch and saves time.

2. Private Limited Companies Are too Complicated to Manage

The Myth- Most entrepreneurs have an opinion that managing private limited companies is encumbered by extensive documentation and overly regulated, thereby becoming a hassle while operating the business.

Reality- Private companies are indeed characterized by the existence of certain legal commitments that are fairly manageable and help safeguard the stakeholder’s interest.

Annual Return- The Annual return and financial statements have to be submitted to the Registrar of Companies. Modern technology and professional services have helped to make it quite easy.

Transparency in Governance- Effective compliance improves the trust among people and proper governance. Digitization of file submissions and even portals has minimized compliance management operations to a larger extent.

3. Private Limited Companies are Suitable Only for Big Businesses

The Myth- Most small business owners believe that private limited companies are meant for big businesses with a high scale and turnover.

 Reality- Private limited companies are suitable for every type of company irrespective of its size.

Small-sized firms and start-ups- Many start-ups adopt this form of organization because of the practicality, liability to minors, and raising funds.

Scalability- Small businesses can benefit from the structure’s ability to grow without structural changes.

4. Private Limited Companies Lose Ownership Control

The Myth- The idea is that registration as a private limited company waters down owners’ control in the business since decisions are to be taken involving Directors and Shareholders.

Reality- The owners of a Private Limited Company retain majority control over the business.

Shareholding Structure- The owners can arrange shareholding to retain majority interest, which means decision-making power.

Board of Directors- The directors are often the shareholders themselves, so it is easy to maintain alignment in decision-making.

Balancing- Private limited companies provide a balance between professional management and ownership control that is perfectly transparent yet quite flexible to operate through.

5. Private Limited Companies Cannot Raise Funds Easily

The Myth- One of the common myths is that private limited companies find it difficult to raise funds compared to public companies or partnerships.

The Reality- The Private limited companies can access a wide range of funding options like-

Equity Financing- They can issue shares to raise capital, which is a huge advantage over partnerships or proprietorships.

Attracting Investors- Often, venture capitalists and angel investors, as well as institutional investors, prefer private limited companies; institutional because of structured governance and accountability.

Bank Loans- Banks lend more to private limited companies since the company is credible and attains legal standing.

6. Private Limited Companies Are Not Tax-Friendly

The Myth- Private limited companies are considered to be taxed more and, therefore, less profitable.

Reality- There are many tax benefits that private limited companies have-

Corporate Tax Rates Are Lower- Companies operating domestically with turnover up to Rs 400 crore attract a tax rate of 25%, which is comparable to individual tax rates for proprietorships.

Deductions and Incentives- Companies get the benefit of many deductions allowed by the Income Tax Act, which automatically lowers their taxation burden.

Startup Tax Exemption- Registered startup benefits from different schemes initiated by the government- Startup India- regarding tax reliefs.

7. Private Limited Companies Are Difficult to Close

The Myth- One of the myths is that closing or winding up a private limited company is a very complicated, time-consuming, and expensive affair, which discourages entrepreneurs from opting for this form.

The Reality- The closing of a private limited company does involve a proper legal procedure, but recent reforms have made it much easier-

Fast Track Exit- The Ministry of Corporate Affairs brought in the mode of FTE under the Companies Act of 2013. Inactive companies can now be closed with very minimal formalities.

Voluntary Liquidation- Those companies can apply for liquidation with shareholders’ approval in which no amount of liability is due.

Less Paperwork- The digital filing and online portals made it easier to submit the relevant documents.

Conclusion

A private limited company is a very strong and flexible business form, more applicable to entrepreneurs in most industries. Many remain discouraged from adopting this type of structure due to legends that it costs too much, is unnecessarily complex, and gives less control over the company, which is all far from the truth.

Private limited companies are excellent options for businesses to reach long-term growth, mainly due to limited liability, credibility, access to funding, and scaling factors. A consideration of these disadvantages debunks common myths, thereby enabling entrepreneurs to make informed decisions and leverage every opportunity the structure presents.

Reference

The Companies Act, 2013 (Act No. 18 of 2013)

https://www.mca.gov.in/

https://www.icsi.edu/home/