When starting a new business in India, the most complicated part arises in the selection of the most appropriate form of business structure. There are multiple options available for business structures in India. Such as a proprietorship firm, partnership firm, one-person company, public company, etc. One such, very popular business structure is a private company. This article discusses all the pros and cons of private company registration in India.
Pros of private company registration
We will dive into the positives of company registration in India first:
The most important benefit of the majority of private companies is that the promoters usually opt to go ahead with the limited liability company registration. Here, the liability of the promoters or shareholders is only limited to the extent of their shareholding percentage, or otherwise as expressly mentioned in the charter documents of the company.
Separate legal existence
The private company registration process takes place online on the portal of the Ministry of corporate affairs. Once the process is complete and the certificate of incorporation is issued, the private company gets the status of being a separate legal entity. This means, after the issuance of the certificate of incorporation, the company can own and sell property in its name, enter into legally enforceable contracts, and have a perpetual succession and a unique sign and stamp. This separation is mostly advantageous because it allows keeping the actions of the company and its owners, ie. shareholders separate, as and when required.
Ease in meeting Capital Requirements
Capital in a private limited company refers to its share capital. There is an ease of capital generation in private companies. This can happen by way of share issuance. Share issuance is allowed in varied manners such as private placement, right issue, and also lately by creating ESOP pools. This allows them more exposure from angel investors and venture capitalists.
Easy transfer of ownership
IN private companies, it is very easy to transfer ownership. It can happen through the transfer or sale of shares owned by the current shareholder. There are no restrictions on the transfer of ownership under the company laws. However, there might be certain restrictions or rules associated, based on a particular company’s charter documents. So, when a company’s charter documents allow free transferability, then the shareholders can easily transfer or sell their ownership in the company.
Perpetual Existence or perpetual succession refers to a unique feature of a company. This unique feature allows the company to remain unaffected by the death of one or more of its owners and shareholders. This perpetuity is a boon to companies, arising from it being a separate legal entity. Hence, even in the event of the death of a shareholder, the company can carry on functioning regularly, as long as no work is hampered.
Cons of Private limited company registration
Burden of Compliance
As a result of the corporate governance norms in India, all private companies registered in India have to undergo stringent legal and regulatory compliances. The compliance requirements include the following mandates:
- maintenance of statutory registers;
- annual return filing;
- audit mandates;
- tax regulations; and
- corporate social responsibilities.
The successful completion of these compliances requires a lot of resources, such as time, energy, and money. This creates a burden on private companies, especially the ones that are newly incorporated.
Limitation of Control
In most private limited companies, the measure of control is dependent majorly on the shareholding pattern. The shareholder with majority shares is usually the one with the final say. This might lead to certain control and management issues in the company in the future. Further, the differing opinions and views of the shareholders and the Board of Directors often also lead to delays in taking important decisions. This is something that might not prove to be in favour of the company.
Public Disclosure of Information
When a company or an LLP is registered or incorporated on the Ministry of Corporate Affairs (MCA) portal. All its basic information becomes available to the public through the Maser Data portal of MCA. Here, the name, CIN, Directors’ name, authorised share capital, email ID, phone number, etc. are all shown on the website. This web portal is available for all to see. Even though there are positives of having transparency, this extent of display of information to the public might also backfire against companies under certain specific circumstances.
Restriction on Fundraising
Even though private limited companies have modes of raising funds through private placement or the right issue. It is still restricted from soliciting capital from the public at large. The scope of raising capital is restricted to a private group of individuals, you cannot directly approach the general public. To be authorised to do so, you need to register your company as a public company.
Not so free transferability of Ownership
We already saw in the pros, that the company laws do not impose any restrictions on the transferability of share capital. However, it is quite a general practice to impose certain restrictions, by the owners of the company. These restrictions are valid and applicable if they form a part of the charter documents, ie., MOA or AOA, or even the shareholders’ agreement.
Just like a coin, even all business structures have two sides. Through this article, you can get an idea of the advantages and disadvantages of online private limited company registration in India. If after careful consideration, you feel that this is your ideal way to move ahead, you can take help from online certified experts to make the process simpler for you.