When any individual/s thinks of starting up a business, the first question is the type of company they want to start. Whether it should be a private company or a public company, two kinds of companies have their pros and cons but what’s better suited for a startup and which type of company will be more favorable to them in terms of profit-making is the real question? In this article, we will see how a Private limited company is better for startups.

Difference between Public and Private limited companies 

A private entity is an entity under private ownership in which the shareholders cannot transfer/trade the shares on public exchanges/securities. A public entity is a corporation where the ownership is with the general public shareholders, and trade takes place within an open market. Following are some of the differences between a public and a private limited company:

• For a public company to be incorporated, the minimum number of members is seven, whereas the minimum requirement is two for private companies.

• The second difference is in the transferability of shares. The shareholders of a private company cannot transfer their claims to the public instead of the public company’s shares which are very much transferable.

• The third difference is in terms of paid-up capital. The minimum paid-up capital of a public company is Rs 5 lakhs, but there is no limitation in paid-up capital for a private company.

• Another difference between them is that there should be at least three directors in a public limited company, whereas 2 is the minimum number of directors in a private company. 

• One of the significant differences between the two companies is that there is no requirement for the mandatory general meeting in the case of a private company as opposed to a public company.

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Startups in India

Business involves greater risk, and when starting up, especially in a country like India where the population is so high and almost everyone wants to start their own business, what are the chances of success?  

India has been one of the most preferred startups because of its exposure and cost-effective nature. Not everyone has considerable capital, to begin with. Here are some of the facts which might act as basics in terms of startup history in India:

• India is the 3rd largest startup ecosystem in the world.

• India has seen a 12-15% annual growth approx.

• There is an availability of cheap labor.

Some things should be kept in mind before starting up a business, like very detailed market research, checking whether the product or service offered by you meets the demand of the public, etc. These things are significant to make the startup a successful one. Put your innovative solution to a problem you see with practical aspects in mind, and it plays an essential role in creating successful startups.

Here’s why a Private limited company is better for startups

Many advantages can be availed by a startup if it is a private company. Some of the reasons why a Private limited company is better for startups are:

• No minimum paid-up capital: As per the latest amendment in the Companies act of 2013, for starting a private company, there’s no minimum paid-up capital requirement. Earlier, it was Rs 1 lakh. This amendment has been a considerable advantage for those worried about the capital aspect before starting their company/business.

• Limited liability: Another significant advantage of a private company that is not there in a public company is the limited liability of the shareholders. There are two types of limited liability, i.e., limited by shares, limited by guarantee. It means that if the company is under any financial crisis or distress, the shareholders only have to pay the amount they are responsible for, i.e., their share amount in the company. This is a massive advantage for a startup. 

• No public interference: The third advantage of starting up as a private company is that the company runs pretty smoothly without much public interference. Since there is no involvement of the stock exchange, transferring of shares to the public makes a new business flourish more with their own rules. Private companies have the autonomy of forming their policies.

• The attraction of FDI: Another very significant advantage that is offered to a startup in case it is private in nature is that such companies attract a lot of FDI( Foreign direct investment)^[1]. Multinational companies and foreign companies usually look for private companies to partner with as they find private companies better in terms of profit-making than a public company.

• Separate legal entity and perpetual succession: Another advantage that is kind of familiar to both public and private companies ( can only be offered after official registration) is that recognition as a separate legal entity and a perpetual succession. These terms are pretty clear on their own. With these benefits, the power of suing and being sued comes naturally, making private limited companies better for a startup.

Incorporation of company 

If the startup chooses to be a private company, they have to incorporate their company lawfully before the registrar in some simple steps.

Steps of incorporation 

Following are the steps of incorporating a company:

Step 1: obtain the digital signature certificate. 

Step 2: Apply for the Directors identification number.

Step 3: name approval of the company

Step 4: filing form SPICE- INC32

Step 5: filing for E-MOA and E-AOA

Step 6: Applying for PAN and TAN applications.

Step 7: Upon verification, the MCA ( Ministry of Corporate Affairs) issues a certificate of incorporation.

Conclusion – Private limited company is better for startups

The type of entity plays a very significant role for a startup. Starting right is very crucial for a successful startup. If the first step is wrong, it becomes challenging for such an entity. Planning for a startup business carefully is very significant; otherwise, it can be very challenging. One should always think about the type of entity they want to incorporate, and whether it’s a public or private company, one should be aware of all the pros and cons of such a type. However, a Private limited company is better for startups and is the preferred type when it comes to startups, especially as it offers a variety of advantages.

Read our article:Guide on Investment in Private limited company