Imagine a situation if you want to start your own business- then the first question which will come in your mind is that which business model you should select. Should it be proprietorship, partnership firm, a private limited company, public limited company or LLP? Normally if seek someone advise they will guide on the basis of very vague and the basic reason such as limited liability, flexibility in the business decision and so on.
As a businessman, it is quite difficult to understand the nitty-gritty of each and every business model due to lack of adequate insight on the different business structure.
To do away with this problem, we through this article provide you some relevant criteria for making easy for you to opt for private limited company as follows:
- Liability: Liability means liable for debts and obligation of the business. In the case of small business operation, it may not be major criteria but when the scale of operations is at very large scale then it may risky affairs to select business structure where personal properties of the owner can be annexed to fulfil the obligation of the business. In this context, private limited companies are considered to be best because in the case of default personal properties of the shareholders are not annexed to fulfil the business obligation.
- Raising investment and Loans: Private limited companies have much easier access to raise foreign direct investment and loan as compared to LLPs. Even foreign investors preferred company structure to invest because it is easier to define the responsibility and liability in private limited companies. Venture capitalists also prefer private limited company for investment purpose because of well structuring of responsibility and duties of each party. Foreign loans like External Commercial Borrowings (ECBs) are not accessible by LLPs and partnership firms under RBI regulations.
- Related Party Transactions: Related party transactions relates to dealing amongst the close network of directors or promoters. There are certain relaxations which accrue to private limited companies as compared to public limited companies.
- Director Loans: Transaction between director and company are very common phenomena. Loan to a director is a kind of transaction. As per new Companies Act, 2013, earlier there was total prohibition on such transaction but as per notification recently issue, now loans can be provided to directors.
- ESOPs: Employee Stock Options (ESOPs) is a method to motivate employees. Company especially, IT companies issue ESOPs to their employees to motivate them to work harder. Issue of ESOPs can only be possible in case of private limited company, not in LLPs. Therefore, it is difficult to issue ESOPs in LLPs because ESOPs are governed by the Companies Act, 2013 which is not applicable on LLPs.
- Easy Transferability: It is easier to transfer the ownership in the company as compared to LLPs and partnership firms. This gives a comfort to the shareholders to exit from the company.
- Start up's preferred form: Start-ups are mostly formed as private limited company and this entity also accepted by the government for giving certain exemptions.
We hope readers will understand these points and make a proper decision in the light of above cited reasons. Though these are advantages of private limited companies, but 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 would suggest you to take expert advice before opting any business model.