Imagine a situation if you want to start your own business- then the first question that will come to your mind is which business model you should select. Should it be a proprietorship, partnership firm, private limited company, public limited company, or LLP? Usually, if they seek someone's advice, they will guide based on very vague and the primary reason such as limited liability, flexibility in the business decision, etc.
As a businessman, it is pretty challenging to understand the nitty-gritty of every business model due to a lack of good insight into the different business structures.
To do away with this problem, we, through this article, provide you with some relevant criteria for making it easy for you to opt for private limited company as follows:
- Liability: Liability means being liable for debts and obligations of the business. In the case of small business operations, it may not be a significant criterion, but when the scale of operations is a huge scale, then it may be risky affairs to select a business structure where the personal properties of the owner can be annexed to fulfill the obligation of the business. In this context, private limited companies are considered best because, in the case of default, the personal properties of the shareholders are not annexed to fulfill the business obligation.
- Raising investment and Loans: Private limited companies have much easier access to raise foreign direct investment and loans as compared to LLPs. Even foreign investors prefer company structure to invest in because it is easier to define the responsibility and liability in private limited companies. Venture capitalists also prefer private limited companies for investment purposes because of the good structuring of the responsibility and duties of each party. Foreign loans like External Commercial borrowing (ECBs) are not accessible by LLPs and partnership firms under RBI regulations.
- Related Party Transactions: Related party transactions relate to dealing amongst the close network of directors or promoters. Certain relaxations accrue to private limited companies compared to public limited companies.
- Director Loans: Transactions between directors and the company are widespread phenomena. A loan to a director is a kind of transaction. As per the new Companies Act, 2013, there was a total prohibition on such transactions, but now loans can be provided to directors as per notification recently issued.
- ESOPs: Employee Stock Options (ESOPs) are a method to motivate employees. The company, especially IT companies, issue ESOPs to motivate employees to work harder. Issue of ESOPs can only be possible in the case of private limited companies, not in LLPs. Therefore, it is difficult to issue ESOPs in LLPs because ESOPs are governed by the Companies Act, 2013, which does not apply to LLPs.
- Easy Transferability: It is easier to transfer the company's ownership compared to LLPs and partnership firms. This gives comfort to the shareholders to exit from the company.
- Start-up's preferred form: Start-ups are mainly formed as private limited companies, and the government also accepts this entity for certain exemptions.
We hope readers will understand these points and make a proper decision in the light of the above-cited reasons. Though these are advantages of private limited companies, it does not mean that private limited companies are flawless. There are some reasons which may lead you to go for another form of business. Sometimes, one business model is suitable in an early stage of business, and some are in the expansion stages. We still suggest you take expert advice before opting for any business model.