Advantages and Disadvantages of Private Limited Company in India

What is a Private Limited Company?

A Private Limited Company is defined under Section 2(68) of the Companies Act, 2013 as a company that meets the following conditions:

• Private ownership: Shares are held privately and cannot be offered to the public.
• Limited membership: It limits the number of shareholders to 200 (excluding employees).
• Restricted share transfer: Its Articles of Association restrict share transfers to maintain privacy.
• Minimum capital: It must have a minimum authorized capital (at least ₹1,00,000, though no paid-up minimum).

In practice, a Pvt Ltd company is an incorporated business entity with separate legal existence from its owners. The company itself can own assets, incur liabilities, sue or be sued in its own name. This makes it distinct from its founders and offers many structural advantages (discussed below).

Private Limited Companies are regulated by the Ministry of Corporate Affairs (MCA) and are seen as more credible than unregistered entities. They must comply with statutory requirements (board meetings, annual filings, audits, etc.), which also boosts trust with banks, investors and partners.

Example: A tech startup in Kochi wanting to raise venture capital will typically incorporate as a Private Limited Company. This allows it to issue shares to investors and limits the founders’ personal liability, while giving the startup a continuous legal existence even if founders change.

Advantages of a Private Limited Company

Private Limited Companies offer several benefits to business owners. Key advantages include:

• Limited Liability: Shareholders’ liability is limited to the face value of their shares. If the company incurs debt, creditors can claim company assets, but shareholders’ personal assets remain protected. This “corporate veil” ensures founders risk only their investment, not their homes or savings.
• Separate Legal Entity: The company is a juristic person distinct from its owners. It can own property, sign contracts, and sue or be sued in its own name. This continuity means the company’s operations aren’t disrupted by changes in ownership or management.
• Perpetual Succession: A Private Limited Company continues to exist indefinitely until formally wound up. Death, resignation, or change of shareholders/directors does not affect the company’s existence. This stability makes it easier to run long-term projects or succession planning.
• Ease of Raising Capital: It is easier to attract funding. A Pvt Ltd can issue new shares to bring in investors. In particular, venture capitalists and angel investors typically invest through Private Companies (they cannot invest in unregistered proprietorships or partnerships). Additionally, 100% Foreign Direct Investment (FDI) is allowed in most sectors for private companies, enabling global fundraising.
• Credibility and Trust: Because Private Limited Companies must file financial statements and incorporation details with the MCA, this information is publicly available. This transparency boosts credibility with banks and vendors. Many lenders and large clients prefer dealing with companies over informal businesses. MCA filings also include director details, making the company appear professional and trustworthy.
• Transferable Shares: Shares can be transferred (subject to AOA restrictions), enabling ownership to change hands smoothly. Unlike a partnership where transfer of interest can be cumbersome, a Pvt Ltd allows shareholders to sell shares by filing a share transfer form and surrendering share certificates. This flexibility can help founders exit or bring in new investors.
• Ownership and Management Separation: A Pvt Ltd can have a distinct board of directors and shareholders. Owners can hire professional managers, while shareholders retain ultimate control. Board members can also be employees, allowing a founder to be both an owner and an executive. This dual relationship structure suits growing businesses that need professional management.
• Tax Structure: Companies pay corporate tax on profits, which can be lower or more stable than personal tax rates. (Note: Corporate tax is a flat rate around 25–30%, and while Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT) apply, companies can still benefit from tax planning and deductions unavailable to unregistered businesses.)
• Other Regulatory Benefits: Private Companies can open bank accounts and payment gateways more easily than unregistered entities. They are also eligible for government schemes (e.g., Startup India recognition) that require corporate structure. Moreover, a Pvt Ltd can hire unlimited employees and grant stock options, facilitating growth and talent acquisition.

Disadvantages of a Private Limited Company

While powerful, a Pvt Ltd company also has drawbacks that founders should consider:

• Regulatory Compliance: Private Limited Companies face significant compliance requirements. They must hold at least four board meetings and one annual general meeting each year, maintain statutory registers, get accounts audited annually, and file multiple e-forms with the ROC (e.g., MGT-7 for annual returns, AOC-4 for financial statements). These obligations mean higher administrative costs (hiring accountants/CAs) and work compared to a sole proprietorship or partnership.
• Higher Setup and Maintenance Cost: Forming a Pvt Ltd involves government fees (which vary by state and capital) plus professional fees for drafting documents, obtaining DSCs, etc. For example, initial government fees in Kerala are around ₹11,100 for ₹1 lakh capital. Startup India notes basic incorporation costs of ~₹8,000 (excl. state premiums) plus annual compliance costs ~₹13,000. In practice, total expenses (including CA fees) may be ₹15,000–20,000 or more. In contrast, a sole proprietorship has virtually no registration cost.
• Complexity for Small Businesses: A Pvt Ltd must have at least 2 directors and 2 shareholders, so a sole entrepreneur cannot incorporate it alone. (A One Person Company (OPC) structure was introduced for single founders, but OPCs must convert to Pvt Ltd if turnover exceeds ₹2 crore or capital ₹50 lakh.) Also, certain forms and filings (e.g. e-forms on MCA) require familiarity with corporate procedures, which can be daunting for first-time entrepreneurs.
• Restricted Share Transfer: Although shares are transferable between members, a Pvt Ltd cannot freely list or trade shares on stock exchanges. Its Articles of Association usually require any transfer to be approved by the board or existing shareholders. This limits exit options. Also, a Pvt Ltd cannot issue a public prospectus to raise funds from the public, restricting access to capital markets.
• Limited Membership: The cap of 200 shareholders can limit very large-scale ownership. A company that outgrows this (or plans for a public offering) must convert to a Public Limited Company. For most SMEs this limit isn’t a problem, but it’s a constraint if you aim to scale enormously.
• Public Disclosure: Pvt Ltd companies must file financial statements and certain returns that become public records. Some business owners consider this a disadvantage because proprietary information (like profits) is accessible online via the MCA portal. By contrast, partnership firms have no public reporting requirement.
• Tax and Regulatory Requirements: Despite popular belief, Pvt Ltd companies have no major tax breaks over other entities. Profits are taxed at the corporate rate (around 25–30%), and distributions face DDT/MAT. Additionally, stringent rules apply: for example, 15% tax surcharge if profits exceed ₹1 crore. By contrast, an LLP or OPC can sometimes have simpler tax treatment.
• Winding Up Complexity: If you need to close the business, winding up a company is more complex, time-consuming and costly than dissolving an unregistered firm. Legal procedures and creditor settlements must be followed meticulously, often requiring professional help.

In summary, Private Limited Companies offer capital access, liability protection and credibility, but at the cost of complexity and compliance. For many growth-oriented ventures, the benefits outweigh these costs, but small solo entrepreneurs or those wanting simplicity might consider alternatives (like a One Person Company or LLP). See our [link to LLP Registration Page] for details on an alternate structure with fewer compliances.

How to Register a Private Limited Company?

Registering a Pvt Ltd company is now done online via MCA’s SPICe+ form. Here is the typical process and timeline:

1. Name Reservation (SPICe+ Part A): Propose up to two unique company names to the Registrar of Companies (ROC). The ROC usually approves the name within 5 working days, barring objections. If rejected, you can resubmit new names.
2. Obtain Director Digital Signatures (DSC): Each director needs a Class 3 Digital Signature Certificate for signing forms online. Getting a DSC involves identity verification and typically takes a few days. (Foreign directors must apostille their passports and address proofs.)
3. Apply for DIN (Director Identification Number): If a director doesn’t already have a DIN, it is allotted while filing SPICe+ (Part B). DIN is a unique ID required for company directors.
4. Fill SPICe+ Incorporation Form (Part B): Complete SPICe+ Part B within 20 days of name approval. Attach the e-MOA and e-AOA (digital MoA/AoA). Include consent letters from directors, proof of registered office, ID/address proofs, and other KYC documents.
5. Attachments and Submissions: Upload all required documents on MCA portal: director KYC (PAN, Aadhaar, photo), consent forms, utility bill as address proof of office, rent agreement + NOC, and the above e-MOA/AOA. Ensure Company name and objectives match across documents.
6. Pay Fees and File: Pay the government fees (varies by state and capital) as per MCA fee schedule. Submit the form. The ROC will examine the application.
7. Certificate of Incorporation: If all is in order, the ROC issues the Incorporation Certificate (with Company PAN/TAN) within ~5 working days of submission. In practice, from name approval to Certificate often takes 10–15 business days (though delays can occur if clarifications are needed).

After incorporation, you must also apply for a Commencement of Business (INC-20A) within 180 days on the MCA portal (now a formality). You can then proceed to open a bank account in the company’s name and start business operations.

Timeline Example: Under normal circumstances, name approval and DSC/ DIN arrangement (~5–7 days), followed by SPICe+ filing and approval (~5 days), totaling about 10–15 working days.

Documents Required

The key documents needed for registration include:

• Identity Proof: PAN card and Aadhaar for Indian directors; passport (with apostille) for foreign directors.
• Address Proof: Utility bill (electricity/water), voter ID, or passport. If using a rented office as registered office, rent agreement and NOC from owner.
• Photographs: Recent passport-sized photos of all directors.
• DSC and DIN: Digital Signature Certificates and DINs for all directors.
• Registered Office Proof: If owned, utility bill in company name; if rented, rental agreement and NOC. A non-empty office address is mandatory.
• Other KYC: Current bank statement or telephone bill for directors may be required by some professionals.

All documents must be in scanned PDF form for online submission. (TargoLegal can assist in preparing and uploading these.)

Costs and Fees

Government Fees: MCA charges depend on authorized capital. For low capital (₹1–10 lakh), government fees are a few thousand rupees (see table below). State-wise additional stamp duty/fees apply. For example, Kerala’s registration fees are ~₹11,100 for ₹1 lakh capital (higher than many states).

Professional Fees: Besides government charges, you’ll incur professional fees for drafting MOA/AOA, consultant charges, DSC issuance etc. In total, expect around ₹15,000–20,000 (sometimes more) for complete incorporation in Kerala, inclusive of all charges.

Example Fee Schedule (Government Fee for Company Registration):

(Notes: The above are central fees; Kerala’s total stamp duty pushes the ₹1 lakh band to ~₹11,100. Professional fees by CA/consultant are extra.)

Running Costs: After incorporation, annual costs include statutory audit fees (mandatory regardless of size), ROC filing fees (nominal), and tax compliance. As noted by Startup India, annual compliance can be on the order of ₹13,000 or more, excluding any tax payments.

Annual Compliance and Statutory Requirements

A Private Limited Company must meet the following ongoing compliance every year:

• Board Meetings: Hold at least 4 board meetings in a year, with not more than 120 days gap between two meetings. Minutes must be recorded.
• Annual General Meeting (AGM): Hold one AGM every year (within 6 months of financial year-end). The financial statements (audited) must be presented to shareholders.
• Statutory Audit: Get the company’s books audited by a Chartered Accountant every financial year. The audit report is part of annual filings.
• Annual Filings: File Form MGT-7 (annual return) and AOC-4 (financial statements) with the ROC within the prescribed deadlines (typically within 30–60 days of the AGM). This includes balance sheet, profit & loss, director reports etc. Non-filing attracts penalties.
• Tax Returns: File Income Tax returns, GST returns (if applicable), TDS returns etc., like any other business. The company needs a PAN and TAN (obtained at incorporation). Use tools like our [link to GST Calculator] to manage indirect tax compliance.
• Compliance Certificates: Directors must maintain digital signatures for MCA filings and do periodic eKYC. Annual return on beneficial ownership (UBO) is also required by 2023 regulations (RMSB filings).

Failing to comply can lead to hefty fines, DIN disqualification, or even company strikes. Due to these obligations, many Pvt Ltd owners engage professional CA firms (like TargoLegal) to handle all filings on schedule.

Alternatives: LLP and Other Structures

For some entrepreneurs, a Limited Liability Partnership (LLP) or One Person Company (OPC) might be preferable. For example:

• LLP: An LLP offers limited liability like a Pvt Ltd but with fewer compliances. It requires at least two partners (but no cap on partners) and no minimum capital. No mandatory audit if turnover < ₹40 lakh. However, unlike a Pvt Ltd, an LLP cannot raise equity via shares and might be viewed as less formal.
• OPC: A One Person Company allows a single founder with limited liability. It’s effectively a mini Pvt Ltd with one member. But it has to convert to Pvt Ltd when turnover > ₹2 crore or capital > ₹50 lakh.

If your business has modest funding needs and you want simpler compliance, consider an LLP. Learn more on our [link to LLP Registration Page] and [link to Company Registration Page].

Conclusion

A Private Limited Company offers distinct legal benefits – such as limited liability, perpetual succession and enhanced credibility – which make it very attractive for startups and growing businesses. However, these come with regulatory obligations and costs, including mandatory audits, regular filings and startup fees. Entrepreneurs should weigh these pros and cons carefully.

If you are considering setting up a Pvt Ltd in Kerala (Kochi, Trivandrum, Ernakulam, etc.) or Bangalore, TargoLegal’s expert CAs can guide you through the entire process – from registration and compliance to annual filing. Use our [link to GST Calculator] to estimate your tax needs, and compare with other structures (see our [link to LLP Registration Page]).

Talk to a CA now on WhatsApp to get personalized help and a free consultation on your Private Limited Company registration. Our team will ensure your business is set up correctly, compliantly, and with minimal hassle.