3 Reasons Why Not to Go For Private Limited Company Registration

For all the newbie’s and the to-be entrepreneurs out there, the most daunting task is not to think of a mind-boggling idea which would enhance your fortune, rather it is to get your idea take shape in the world, bit by bit in line with the pre-established legal system.

Merely pouring your ideas on paper, without a suitable structure will not guarantee entrepreneurial success on the long and arduous journey.

 How to set-up a start-up legally?

‘Steve Jobs, Jack Dorsey, and Elon Musk have created several multibillion-dollar companies.’

Gaining inspiration from such successful entre- stories, newbie’s are often confused if they always have to incorporate a private limited company to start their journey.

The answer is no! There are many other ways to start a business in India. The simplest way to start is to open a bank account and acquire a tax license.

Let’s probe the reasons why we should not opt for a Private Limited Company Registration.

 

1- Heavy on the pocket

Start-ups are characterized by a gamut of ideas with limited funds. In the initial phase, an entrepreneur has to spend every penny like a miser, to sustain throughout the race.

Registering a Private Limited Company in India is a costly affair. Moreover, it is not a one-time outlay of resources rather it has some annual obligations. Yearly annual compliances, accounting makes it difficult to curb cash outflows.

Alternatively, you can start-off without any tedious registration and no filing fee. You are required to open a bank account and need register under any one or more of the following:

  • Licensing under Shops & Establishments Act (for all office establishments)
  • Professional Tax (for all employers)
  • MSME registration (for small- and medium-sized manufacturers and service providers)
  • Importer-Exporter Code
  • GST (Goods and Service Tax)
  • FSSAI Registration.

2- Legal Complexities

With the introduction of the Companies Act,2013 the provisions governing Private limited companies have become stringent.

All the Private Limited Companies incorporated are bound to adhere to some stringent and binding provisions of the Companies Act,2013. Failing which heavy penalties will be levied.

Also, there are certain restrictions imposed on such companies which are:

  • The Director or shareholder cannot withdraw money directly from the company, anytime.
  • There are restrictions on directors for taking a loan from the company.
  • Money can be extracted out of the company, only in case of adequate profits.
  • Remuneration should be in consonance with the Companies Act, 2013 etc.

There are many other matters which are under the lens of the law, in case of a company.

On the contrary, there is more liberty available if you wish to sail solo. There are no specific legal restrictions apart from the guidelines of the tax registrations, whose licence is obtained.

3- Compliance Burden

An entrepreneur is usually not a pro in all facets in the initial phase, they ought to focus on the core objective to thrive through all odds.

In case of Private Limited Companies, a director can never be free in all respects. The compliance burden is so high that they end up wasting a major chunk of their time dealing with compliance burden. The compliance obligation extends through the following stages:

  • Incorporation process
  • Annual statutory compliances
  • Any rectification or modification in the basic parameters, like a number of directors, capital introduced etc.
  • Closure of a Private Limited Company.

The compliance burden not only drains finances, rather the crucial time and energy invested in adhering to the same.

On the other hand, there are no such obligations for a sole proprietorship. It is easy to start and dissolve. Further the same can be converted into another entity in case of expansion.

Opting for a proprietorship over a company agitates entrepreneurs. They are scared to remain as sole proprietors, afraid of its shortcomings. The best approach is to start with a lean start-up and gradually built your business and pivot to upgrade yourself in a fully fledged company.

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