Disadvantages of Private Limited Company

Private limited company is an ideal business entity for a majority of medium and large sized business, as it offers a host of advantages from liability protection to easy transferability. However, operating as a private limited company is not ideal for all businesses, especially micro or small enterprises. In this article, we look at some of the disadvantages of a private limited company.

Registration Process

Private limited company registration on average takes about 10 - 15 days and costs Rs.15899 (all inclusive) through IndiaFilings.com. Hence, registering a private limited company involves a process and costs which are not applicable for an unregistered entity like proprietorship. However, once registered, private limited company enjoys a wide variety of powers and rights, making process for opening bank account or getting a payment gateway, easy. Proprietorships or partnership firms often encounter difficulty post registration while having to open bank account or obtain a payment gateway, as they are considered to be unregistered business entities.

Compliance Formalities

A private limited company requires a range of compliance post incorporation. All companies are required to hold board meetings, general meetings, get the accounts audited, maintain statutory register and file annual return with the Ministry of Corporate Affairs each year. In addition to the corporate compliance formalities, a company would also have to maintain compliance with tax and labour laws, which are applicable irrespective of the type of business entity.

Division of Ownership

A major disadvantage of private limited company is that it requires a minimum of two persons to act as Directors and shareholders. So, any sole entrepreneur who wishes to start and operate a business by him/herself cannot start a private limited company. Hence, any major decision to be taken by a company would always require the consent of two persons. The company would also need to have two shareholders, even if one person hold a negligible amount of shareholding. To empower entrepreneurs who wish to start and operate a business by themselves, the Government introduced the concept of One Person Company. However, a one person company also has a few disadvantages, key being a mandatory requirement to convert to private limited company on crossing an annual sales turnover of Rs.2 crores. [caption id="attachment_3577" align="aligncenter" width="730"]

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Personal Liability

The company itself is fully liable for its debt and has unlimited liability. Only the members of a company enjoy limited liability protection. However, in some cases as follows, personal liability of directors and members would also arise:

When in any act or contract, the name of the company has been mis-described, those who have actually done the act or made the contract, shall be personally liable for it;
when in the course of winding up of a company, any business of the company has been carried out to defraud the creditors, persons who are knowingly parties to such conduct shall be personally liable for the debts of the company;

Winding Up of Company

The procedure for winding up of a company can be complicated, time consuming and costly, when compared to a unregistered partnership firm. Hence, its important to register a company only when the promoters are serious about using the company to operate a business.

Advantages of Private Limited Company

Despite the disadvantages listed above, a private limited company is the most preferred type of legal entity for doing business in India. There are also numerous advantages to incorporating and doing business as a private limited company, which must be considered before deciding on a business entity for your business. [caption id="attachment_3562" align="aligncenter" width="730"]

Infographic: 7 Reasons to Start a Private Limited Company