Firstly Mr. Rajkumar must understand that a limited company is a type of company which when set-up allows an entrepreneur to keep their own assets and finances separate from the business itself. This means that people who have invested in the business (the shareholders) are only responsible for any company debts up-to the amount that they have invested and no more. It is therefore a good way for a business to get investment without risk to a personal wealth. Since, Mr Raj wishes to shift from a sole proprietorship firm to a private one, an agreement has to be executed between the sole proprietor and the private limited company (once it is incorporated) for the sale of the business. In this process, for his guidance, I would list down below mentioned points regarding the pros and cons of shifting to a private limited firm:- * For a start, there is unlimited liability of business debts in a Sole Proprietorship, and which extends to even the private assets of the individual. In contrast, in a private limited company, the liability is limited to the extent of shares held but not paid.
* In terms of the staff, just one person that’s the entrepreneur is sufficient to qualify for a valid Sole Proprietorship, while a minimum of two and maximum of 50 people are required for registration as a private listed company. * There is no separate legal entity for the venture, with the sole entrepreneur listed under Sole Proprietorship. In contrast, a private listed company has a corporate identity distinct from its individual members. * A Sole Proprietorship requires no registration before its starts operating. In contrast, a Private Company must be incorporated before the Registrar of companies so that it could be covered under legislation like service tax, professional tax, Provident Fund, ESI etc as applicable.
* There is no charter document for the single-entrepreneur venture while a listed company needs to have a Memorandum and Articles of Association. * Property under sole proprietorship belongs to the individual. In case of a privately listed entity, the company owns the physical assets. * Since the individual and the sole proprietorship share the same identity, the individual can sue or be sued by concerned parties. In contrast, a company can sue or be sued only in its own name since it is a legally registered entity, independent of its members. * When it comes to taxation, a sole proprietorship is taxed as an individual would be on his/her earnings under different slabs. In contrast, a privately incorporated entity will be taxed as a company.
Guidance to formation:
In order to set-up a Limited Company, there are a few criteria that first have to be satisfied. These are laid out by The Companies Act 2006.
* Firstly, Mr Rajkumar must have director identification numbers (DIN) and digital signature certificates in place * Secondly the Company must be registered with Companies House. It is there to help entrepreneurs who are planning to set-up a limited company, it guides you through what is required by the government and offers a number of services to help new start-ups register their business and succeed in the marketplace with few suggested names
* Once the name is approved, the next step is drafting the memorandum and articles of association (MoA and AoA). * After the MoA and AoA are prepared they must be printed and sent to the concerned registrar for vetting and to mark out objections, if any. * The last step is to pay the registration fee, which varies on the basis of the company’s authorized capital, after which the company gets registered as a private limited company under the Companies Act, 1956 and gets its certificate of incorporation.
There are some more things that are required by a private limited company, like getting a permanent account number and a company seal, after it is registered. However, unlike a public limited company, a private company can begin its operation right after getting a certificate of incorporation and complete the rest of the formalities simultaneously.