A private limited company is one type of business structure. In the Indian context, we can divide the question into three distinct parts.
“Company” is a business entity that is separately taxable for income that it earns.
An individual can start a “Proprietorship” which is an entity that exists in name only, but the taxes are borne by the individual.
So I can start an “HP Consultancy” proprietorship which can earn income – I can get cheques in that name – but the net income of that business is charged to me personally and I pay income tax in the name of Hemant Patil.
A group of people can start a “Partnership”. You and I can have a 50-50 percent ownership in a joint entity called a partnership. We can earn money in that name, but whatever profits this entity makes is divided into parts (in the ratio of the partnership) and added to the individual’s income.
So if we make Rs. 2,000 in profits, I am deemed to have made Rs. 1000 (50%) and you, Rs. 1000 (50%).
In both the above business entities, there is no limitation of liability – If for example, our entity takes a loan of `100,000 and I go bankrupt or take away the money, the lender can go after you for the FULL `100,000; the fact that you own just 50% of the enterprise doesn’t matter.
A company is a business entity where you and I will buy “shares” – or a part of the company, and where the business earns money, it is taxed on that income separately.
So if a business in which you have 60 shares and I have 40, earns Rs. 2,000 in profit, it might pay Rs. 600 in taxes, and retain the remaining Rs. 1400. Your individual taxes and mine are not affected at all.
But a company can then decide to “distribute” the retained profit, as a “dividend” – which goes in proportion to all shareholders.
So for the 100 shares, the company has, if it decides to give out Rs. 10 per share as a dividend, the total payout is Rs. 1000, out of which you get Rs. 600 (Rs. 10 per share for 60 shares) and I get Rs. 400.
In India, there’s a dividend distribution tax of around 17%, so the company will pay Rs. 170 as tax to the government (Thus, it makes tax sense not to distribute all profits to avoid paying that tax)
“Limited” means your liability is limited to your ownership stake.
The term “limited liability” means that the individual shareholders’ contribution towards the company does not exceed the amount agreed upon as personal contribution to the capital of the company.
If the company takes a loan from a bank, the recovery can only be from the assets in the business, not from the shareholders. Suppose, if a company takes a loan of `1,00,000 and in case it cannot pay back, then as a shareholder, you will not get affected at all.
The bank can attempt to sell stuff the company owns and recover what it can – but it can’t come to us to sell, for instance, our houses to pay up.
“Private” means that the company isn’t public, as defined by the companies act. A private company is a type of privately held small business entity.
A is a separate legal entity, that is different from its directors and shareholders. under the Companies Act.
It is the most popular corporate entity amongst small, medium and large businesses in India due to various advantages.
- Ideal for Startups & Growing Business
- Easy to get funding, Raise Venture Capital Fund
- Limited Liability
So a Private Limited Company is an independently taxed and accountable business entity, where each shareholder has liability limited to his or her shareholding, and which is not “public” as defined by the Companies Act.
Many start-ups register as a ‘Private Limited Company’ as it is the only entity to get Seed funding. It is thus the most popular legal entity in India.
In India, 8000 Companies and 900 LLP’s are registered on an average monthly basis. Corporations prefer Private Limited Companies over other legal entities.
- Private Limited Company is a Company which has a Minimum of Two members and a Maximum of 200 Members
- Pvt. Ltd. Offers Limited Liability or Legal Protection for its Shareholders.
- Pvt. Ltd. Company is Ideal for Entrepreneurs who want a Separate Legal Entity with Limited Liability and Perpetual Succession.
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