Many of the local consultants in India talk about avoiding registration of company. They state that the registration and compliance cost of a company are huge and hence the start-up should register itself as Sole Proprietor and not as a Private Limited Company. However, what they ignore is that there are various long term advantages of Private Limited Company over Sole Proprietor which are quite important and in this article we are highlighting the same.

 

 

 

 

1. Limited Liability-

In a sole proprietorship there is unlimited liability i.e. if your organisation goes for winding up/ liquidation your personal property shall be attached. However, in case of Private Limited Company barring very few cases the owner’s personal property can never be attached. As per the regulation of Companies Act, 2013 a company has a separate legal entity which is different from its owner and hence the personal property of the promoter can never be attached.

2. Funding-

One of the main sources of capital for most start-ups is Investment. Unlike a Sole Proprietorship where there can be only one owner, a Private Limited Company can have multiple owners in the name of shareholders. This attracts investment. Investors prefer to invest in Company as it provides different types of instruments by which they can fund the organisation.

3. Taxation-

As stated previously a Private Limited Company is a separate Legal Entity. So, the income and expenses of the promoter shall be different from the income of the company. In other words segregation can be done. However in sole proprietorship this isn’t so. The income of sole proprietor shall be clubbed with the owner and hence put it to a disadvantage.

4. Naming and Brand Promotion-

A Private Limited Company has a name acknowledged by the Ministry of corporate affairs. So, nobody can exactly copy the name and use it as a brand. But in case of sole proprietor there is no law to stop another organisation from using the name. In simple words Private Limited Company helps in Brand protection and Brand loyalty which is not possible in case of sole proprietorship.

5. Compliance Cost is not that high-

One of the greatest misconception start-ups have is that of the Compliance cost. They believe that if they form a company there is a huge compliance cost burden on them. But the reality is a bit different. In case of sole proprietorship too you need to maintain your accounts and file return which shall be chargeable by the person/ CA who prepares it. Moreover VAT/CST/ Service Tax/ PPF/ ESI are applicable irrespective of the type of entity. All in all if we observe closely the difference would add to around 5000 to 6000 for the whole year.

6. Conversion of Entity is a costly procedure-

Though advised by many to start with a sole proprietorship and then to convert it as Private Limited Company this process should be avoided. This is because the process of conversion involves asset transfer which is a costly and complicated. The financial and regulatory work is huge and this adds up to the expenses of the organisation.

 

All in all, if somebody is a long term player who believes in his product one must always go for a company rather than a sole proprietor.

 

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