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Yes, a private limited company is considered a highly preferred structure for businesses that want to avail funding more easily in India. This structure is quite commonly favoured by investors, banks and financial institutions as it adheres to the principles of transparency and accountability. It is regarded as a highly regulated company that is overseen by the MCA.
Because of strict compliance requirements and mandatory disclosures, a private limited company finds it easier to create trust among stakeholders. If you are looking to start a business and plan to raise funds through bank/other financial institution’s loans or investors, then setting up a private limited company is recommended.
A private limited company is a type of company incorporated under the Companies Act, 2013. To incorporate this company, a minimum of two shareholders and two directors are required. The private limited company registration process involves completion of several steps. It includes obtaining DSC and DIN for proposed company directors and then filing company incorporation form SPICe+ with the MCA along with incorporation documents.
After receiving form and documents, the ROC (i.e., Govt Authority under MCA) carefully examines them for verification purposes. If satisfied with the application as well as documents, the Authority issues the Certificate of Incorporation. This certificate contains CIN, which is a unique identifier assigned to a company to distinguish it from other companies.
Here’s how the pvt ltd co structure makes funding easier for businesses:
A pvt ltd company is regarded as a distinct legal identity from its owners unlike a traditional partnership or a sole proprietorship. This identity ensures continuity and stability and makes the business more reliable for the investors.
Earlier, investments in private limited companies attracted angel tax at around 30%, which discouraged many investors. However, with its abolition, investor sentiment has improved and has led to increased interest in funding such companies.
The pvt ltd companies are subject to mandatory ROC filings, audits and disclosures. These regulatory compliance requirements make it easier for the investors to place trust in such companies’ operations and provide them funding.
Private limited companies have a structured ownership framework with clearly defined shareholding and governance. This framework reduces ambiguity and also helps protect investor interests.
One of the best features of a private limited company is limited liability protection. Because of this feature, the investors’ financial risk is restricted to their investment in the company. Therefore, in case the company incurs financial losses, the personal assets of the investors remain protected.
For capital raising, the pvt ltd company provides a flexible structure by issuing different types of shares such as equity shares and preference shares as per the investors’ needs.
Banks and other financial institutions are more willing to offer loans to private limited companies over sole proprietorships. The private ltd companies are more structured, transparent and subject to regulatory compliance. As a result, overall lending risk is reduced.
Your journey from a vision to a funded reality starts with the right incorporation.
Investors don’t just care about how much of the business they can own. They care more about how big the business can eventually grow. Venture capitalists, in particular, usually prefer structures that can grow quickly and attract future funding. The more the business grows, the better it is for the investors as they gain more profit. Non-corporate structures like LLPs often tend to lack flexibility required for rapid business expansion.
Therefore, many investors hesitate to invest directly in such business structures. It is quite common that institutional investors require conversion to a pvt ltd before signing a term sheet. The reason behind this is that such a structure is clearer and much more standardized.
Share transfer in a private limited company is not only simple but also legally streamlined. But when we talk about changing partners in an LLP, legal procedures are quite complex and can be a pain in the neck. These complications increase risk and reduce investor confidence. Therefore, investors prefer corporate structures that make investment, exit and growth easier.
After going through this blog post, we hope it’s quite clear to you that a private limited company structure makes funding easier for businesses. It is a highly regulated business structure with strict compliance requirements. Additionally, it is regarded as a separate legal entity from its owners, ensuring continuity and stability. Investors, banks and other financial institutions often prefer to provide funding to this structure. If you need assistance in private limited company registration, get in touch with our company registration experts at Registrationwala.
Q1. Can a Private Limited company raise debt and equity simultaneously?
A. A private limited company can, and often does, raise debt and equity simultaneously. This strategy is called a hybrid approach.
Q2. Has angel tax been abolished in India?
A. Yes, the angel tax was abolished in India w.e.f. 1 April, 2024.
Q3. Is it easier for a private company to raise funds compared to a sole proprietorship?
A. Yes, for a private company, it’s much easier to raise funds compared to a sole proprietorship due to higher credibility, stricter compliances and monitoring by MCA.
Hi, I'm Sachin Chawla. I’m a commerce graduate from Agra University and a Chartered Accountant (2015) with DISA certification. I focus on helping businesses with formation, management, tax and FEMA matters, business licenses and regulatory compliance, IP advisory, risk management and auditing among others. Through my articles, I aim to share my expertise and provide practical guidance in these areas.
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