Why Choose Private Limited Company?

By Ashfa Anwer

When you decide on starting a business, its legal structure plays an important role as it will affect the level of tax you pay, the extent of your personal liability, and how easy it will be to pass on or sell the business when you retire. The structure of a company makes it one of the first things to consider before starting a business. In this article, we will be looking at why opting for a Private Limited company in Sri Lanka is a good option. Though forming a Private Limited company is generally regarded as an administration-heavy and complex process, this business structure offers some unique benefits that other entities don’t offer.

Let’s take a look at some of the reasons why its best to choose a Private Limited Company structure for your business:

• Separate legal entity

Forming a Private Limited company means that it becomes a separate legal entity from its shareholders and members. This means that a company is not subjected to the retirement, demise, etc of its members. It also means that such a company is not tied up to its promoters and a company can own properties and incur debts. A Private Limited company also has the ability to sue and be sued in its own name. The company can also lend money in its own name or borrow by issuing debentures and deposits or directly from financial institutions.

• Limited liability

This is one of the main advantages of a Private Limited company. Due to it being a separate entity from its members, its liabilities will also be separate from that of its members. For example, the responsibility of debts taken by the company would be of the company alone and not of its members.

The liability of the members is only subject to the number of shares that they hold and this is not the case with a sole proprietorship or a partnership business where the owners have to bear the full responsibility of the incurred debts. So, in the event a business ends up with huge losses, its members will not have to bear the entire burden of the debts.

• Easy transfer of ownership

In a Private Limited company, the shares and other such interests are deemed to be movable assets, and hence, the shares can be transferred in a manner as provided by the Articles of Association of the company.

This ease of transferability of shares of a Private Limited company makes it convenient for its members to subscribe to or leave the membership of the company at any time. Easy transferability also means that it’s convenient for the members of a company to sell or buy the shares of the company at any time.

• Savings in tax

With a Private Limited company, there can be a significant amount of savings in tax because the rates of corporation tax are lower than the rate of the income tax. Provision of payment of dividends to the shareholders is also provided to Private Limited companies.

Due to the payment of dividends resulting in fewer tax deductions when compared to the payment of salary, the shareholders can benefit from the same. It can also be advantageous for the employees as they can get pension contributions if the employer is of a Private Limited company. Furthermore, the payment of pension is also regarded as a tax-deductible expense, thereby, giving further tax benefits to a company.

• Enhanced credibility

Typically, a Private Limited company will be registered with The Ministry of Corporate Affairs. During the process of registration, a company will have to undergo a process of legal documentation to provide information like its name, registered address, date of incorporation, status, etc. This information is made available at the database of the Ministry of Corporate Affairs for investors and customers, making it easy for interested parties to check company information, thus improving the credibility of the company. 

• Ease in raising money

Quick and hassle-free funding is very important for companies in the initial stages. Since Private Limited companies are governed by stringent laws, it automatically increases their credibility and, as a result, financial institutions are more ready to lend money to the company.

Additionally, Private Limited companies can sell their shares to the public and this makes it an easy funding option for them, as opposed to the case of sole proprietorship where the funding can only be in the form of debts, self-funding, or funding from family members.

• More opportunities for global business

A registered Private Limited company is permitted to get foreign investments without any government approval. Foreign companies and investors can easily invest in a Private Limited company. Direct Foreign Investment opens up avenues for companies to take their business globally, allowing for more growth beyond national boundaries.

• Better status and staff

A Private Limited structure makes a company appear more professional and adds to the goodwill of the business. Private Limited companies are considered to be well-established, credible, and trustworthy.

Besides attracting more investors, such a company also appeals to talented employees as professionals look for opportunities in reputed companies. On top of that, Private Limited companies can offer their employees the option of ESOPs, which is highly regarded among professional staff.

In conclusion, a Private Limited company can avail multiple opportunities for growth and development. As mentioned above, companies that become a separate legal entity is not tied up with promoters in any way and this allows a business to flourish, increasing the growth prospects of the company manifold.