It is important to decide what type of business you wish to start in order to determine how successful your enterprise will be in the future. Making the right choice for the corporate structure becomes essential. You can establish numerous business types, including private limited companies, limited liability partnerships (LLP), sole proprietorships, and public companies.

There are two types of business structures that we are going to examine: sole proprietorships and private limited companies. Let's discuss these companies and how they operate before considering why you should choose one over the other. You may use this to decide on a business with more knowledge.

Why opt Private Limited Company over Proprietorship

What is a private limited company?

A private limited company is one in which shares are held privately and not made available for public purchase. They are only liable to the extent of their ownership. Shareholders can manage the firm themselves or hire directors to do so. 200 is the maximum number of stockholders.

What is a sole proprietorship?

A sole proprietorship is a business with just one owner and no distinction in the law between the person and the company. In this situation, one individual is in charge. The owner is legally liable in an unlimited manner since there is no distinction between the company and the owner.

What is better for a business: a sole proprietorship or a limited company?

Depending on your specific situation, you may choose the ideal business form.

Being a sole proprietor or limited business has both benefits and drawbacks.

Although a sole proprietorship is the simplest business form to set up and requires the least amount of paperwork and commitments, you may find it more challenging to obtain business financing.

A limited company may provide you with numerous benefits, including the ability to raise capital, improve your company's image with clients, and be more tax-efficient. Creating a limited company is more difficult, costly, and time-consuming.

 

What are the distinguishing characteristics of private limited companies?

 

  •  Members: A private limited corporation must have a minimum of 2 shareholders/directors and a maximum of 200 shareholders to be incorporated. Additional authority to name up to 15 directors belongs to the corporation.
  • Limited Liability: This indicates that the risk to the directors' and shareholders' assets is reduced in the event of significant losses. Only the value of the individual director's or shareholder's shares is at risk.
  • Perpetual Succession: Even when any of its directors pass away, go bankrupt, or become insolvent, the corporation still exists.
  • Separate Entity: A private company is a corporate body, implying that its directors and stockholders are not part of the same legal entity as the company.
  • Index of Members: Contrary to many other business types, a private corporation enjoys the benefit of not being required to keep a list of its members.

 

What distinguishing characteristics distinguish a sole proprietorship?

 

  • Solo owner: The registration process for a sole proprietorship is relatively straightforward and requires fewer documents. A sole proprietorship has a single owner who is looking to make money.
  • Unlimited Liability: This means that sole proprietorship owners are entirely responsible for covering the company's losses out of their personal assets.
  • Company Existence: The business's longevity is impacted by the owner's passing into a sole proprietorship. In a proprietorship, there is no permanent succession clause; therefore, in the case of the owner's demise, no one may take over the company.
  • The sole bearer of profit and loss: Profits and losses are solely the person's responsibility. Any loss incurred by a firm or any profit realized by one is exclusively the responsibility of the lone proprietor. That person cannot place the blame for his misfortunes on other people.

 

What is the discrepancy between a proprietorship and a limited company?

 

S.no

Discrepancy in various levels.

Private limited company.

Sole proprietorship

1

Registration

As required by law, it will be registered with the Ministry of Corporate Affairs in accordance with      

No need for formal registration.

2

The name of the business

It must be approved by the Registrar of the company. At the end, you will see the phrase Private Limited Company.           

There is no need for approval before using the name.

3

Separate legal entity

According to the Companies Act of 2013, it is a distinct legal entity.               

It lacks a separate legal entity, and the owner is personally liable for the company's liabilities.

4

Liability

They are restricted to the extent of their shares.

Unlimited

5

Mini and Max members

Mini 2 members and max 200 members

Mini and Max one member is essential.

6

Foreign ownership

In many industries, investing is permitted through an automated approval process.

Not allowed

7

Transferability

Transfers and shares, incidentally

Not transferable

8

Existence

unbiased toward its directors and members.

The sole proprietor determines this.

9

Taxation

Its profits are taxed at a rate of 30% plus any relevant surcharges and cess.

Under the owner’s taxation

10

Legal compliance

There will be board and general meetings. It is required to submit Annual Returns and Annual Accounts to the company's Registrar each year. Additionally, a tax return must be submitted for it.

It is not necessary to hold an annual conference. No requirement to submit an annual report to the company registry. On the basis of the owner's income, it prepares an income tax return.

 

Do I have the option of changing from being a sole trader to being a limited company?

Being a sole trader is an attractive choice for many small company owners and self-employed individuals establishing their own company because it's the simplest business structure to set up. However, you could reach a point where you feel that being a limited company is preferable, and it is pretty easy to make the transfer at that time.

You may want to switch your company's legal form to a limited company for the numerous reasons mentioned below:

  • You want to be more tax-efficient since your profits are rising.
  • To finance your firm, you need to raise money to finance your firm.
  • It is vital to improving the reputation and perception of your company in the eyes of your current and potential clients.
  • Hiring fresh talent is something you want to do.

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