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What is the meaning of the term “Company”?
A company can be defined as an “artificial person”, invisible, intangible, created by or under law, with a discrete legal entity, perpetual succession and a common seal. It is not affected by the death, insanity or insolvency of an individual member. It is a seperate legal entity. This means even promoters incorporate a company, but in eyes of laws, promoters and company are two distinct entities. Company when incorporated can hold assets in it’s name and can be or can sue in it’s name. Apart from this, company is accountable for its losses. The concept of treating company and its promoters as two distinct entities are called “Corporate Veil”.
Types of companies:
There are many ways of illustrating different types of companies. Like one way is dividing on the basis of liability, limited liability company, unlimited liability company and other is on the basis of capability to issue shares like private limited company, public limited company.
- A company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company. This type of company is common in England. A company limited by guarantee may be with or without having share capital.
- A company limited by shares. The most common form of company used for business ventures. Specifically, a limited company is a ” company in which the liability of each shareholder is limited to the amount individually invested” with corporations being “the most common example of a limited company.” This type of company is common in England and many English-speaking countries. A company limited by shares may be a
- publicly traded company or a
- Privately held company.
- A company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return. This type of company may no longer be formed in the UK, although provisions still exist in law for them to exist.
- A limited-liability company. “A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer”, i.e., L.L.C. LLC structure has been called “hybrid” in that it “combines the characteristics of a corporation and of a partnership or sole proprietorship”. Like a corporation it has limited liability for members of the company, and like a partnership it has “flow-through taxation to the members” and must be “dissolved upon the death or bankruptcy of a member”.
- An unlimited company with or without a share capital. A hybrid entity, a company where the liability of members or shareholders for the debts (if any) of the company are not limited. In this case doctrine of veil of incorporation does not apply.
The Advantages of Having a Company Form of Business Organization:
A Private/Public limited company has many advantages over proprietorships and partnerships, as elaborated below.
1. Limited Liability
First and foremost benefit of doing business via company is the limited liability conferred upon the company’s directors and shareholders. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a Company. The unfortunate events like business failures are not always under an entrepreneur’s control; hence it is pivotal to secure the personal assets of the businessman in the event of crises.
Unlike proprietorship and partnership, if a Company becomes insolvent and is wound up, only the assets of the company are used to clear its debts. The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt and are free to carry on business.
2. Legal Entity/Status or Recognition
A private limited company is a legal entity, a juristic person established under the Act. It has its existence separate from its directors and members.
Private limited company status enables you to be taken more seriously than a proprietorship/partnership status does
Operating as a private limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer in dealing with private limited companies than proprietorship/partnership organisations
Easy to attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations
3. Perpetual Succession
Another important characteristic of a private limited company is perpetual succession. It is a popular saying that the directors may come and go the members may come and go, but the existence of a company remains forever. A company once incorporated remains alive unless and until it is wound up by complying with the provisions of Law. The death, disability or retirement of any of its members does not affect the continuity of the company, irrespective of change in its membership
There is no obligation for a Private limited company to commence business/trading within any set time period after its incorporation.
4. Project Cost and Risk Factors
For entrepreneurs going for hi-tech or high capital outlay projects it is always advantageous to go in for a company form of organisation. Where the financial stake involved is high, it is found that banks and financial institutions while sanctioning financial assistance, insist on having a private limited company
5. Easy Transferability
Where it is proposed to sell the business as a going concern, all that is required is to transfer the entire shareholding to the purchaser and thus facilitate easy change in management and ownership. This will save time and money of the Promoters. Huge amount of stamp duty is saved.
6. Dual Relationship
In the company form of organisation it is possible for a company to make a valid effective contract with any of its shareholders/directors. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, director, creditor and employee of the company. For eg:
A) As a director he can receive remuneration.
B) As a shareholder he can receive dividend.
C) As a lessor he can receive lease rent.
D) As a creditor he can lend money and earn interest.
E) As a supplier he can supply goods from his/his family business.
7. Borrowing Capacity
A company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured, accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to the company rather than partnership firms or proprietary concernsA company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured, accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to the company rather than partnership firms or proprietary concerns
Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax deductible costs that can be offset against a company’s profits.
9. Raising Money from Public
Public Limited Companies can raise large amount of capital from the general public by issue of shares and public deposits
Registration of Ppublic Limited Company-
- Minimum 7 Shareholders
- Minimum 3 Directors
- The directors and shareholders can be same person
- Minimum Share Capital shall be Rs. 500,000 (INR Five Lac)
- DIN (Director Identification Number) for all the Directors
- DSC (Digital Signature Certificate) for all of the Directors
This article is written by: ACS Prince Kunal
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