Sole Proprietorship or Private Limited Company?
The choice you make for the type of company you are forming will largely shape the future of your business. So it’s crucial to choose wisely from the get-go. We have outlined what you need to know.
There are many types of business entities you can form – private limited company, unlimited liability partnership, sole proprietorship, public company – but most people opt for either a private limited company or a sole proprietorship. In this article, we will explore why setting up a private limited company is preferred over a sole proprietorship.
PROS AND CONS
Firstly, let’s outline what these companies are and how they function. A private limited company is an organisation which is held privately, meaning its shares are not tradable to the general population. To start a private limited company, a minimum of one natural person director is required and shareholders could be up to 50 (body corporate or natural person). By contrast, a sole proprietorship, as the name suggests, is a form of business in which there is only one sole owner/ trader doing business with the aim of earning profits.
In a private limited company, the risk to the personal assets of a director/ shareholder is limited to the extent of their shareholding. The advantage here is that personal assets of a director/ shareholder cannot be acquired to clear company debts. In a sole proprietorship, on the other hand, the owner has unlimited liability meaning he/ she is liable to pay for the losses of the company from his/ her personal assets.
Likewise in a sole proprietshorship, there is a single bearer of profit and loss – profit and loss are borne by the individual only. Any profit that a business earns or any debts that a business incurs is borne by the sole proprietor only and the responsibility cannot be transferred to anyone else.
Consider too that private limited companies are a body corporate, a separate legal entity, which means the directors can sue, be sued, or dispose of company property. In a sole proprietorship, however, the trader is the one with the business, so any legal proceeding against the company is viewed like a proceeding against the individual.
Perpetual succession is another factor worth considering. A private limited company does not cease to exist after the departure of directors due to any reason. By contrast, there is no provision of perpetual succession in a sole proprietorship and no one can take over the company in the event of death, bankruptcy or insolvency of the owner.
THE RIGHT CHOICE
Sole proprietorships have a slight edge over other companies because of their less stringent compliance requirements – the registration procedure is very easy and has fewer formalities. However, the benefits of a private limited company, as outlined above, surpass the ease of compliance requirements of a sole proprietorship.
Private limited companies have smooth structure of operations and separation of both assets as well as identity, which are important when viewed from a long-term perspective. Moreover, in a private limited company, the trading of shares is done in a restricted manner, which reduces the risk of a hostile takeover.
In addition, there are many provisions for relieving the tax burden with lower tax rates on private limited companies within the confines of the Income Tax Act, 1961. Private limited companies have been granted many exemptions for compliances and operations and hence need less maintenance.
For all these reasons, private limited companies are definitely proving to be the right choice for entrepreneurs.
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