There are certain privildges applicable to a Pvt. Ltd. Company e.g. It need to have to file any prospectus or SLP,Deposits taken by it from its members are exempt from Sec. 58(A),it can issue further shares in any manner as it thinks fit,the restrictions on appointment of directorsetc are not applicable to it.
Accordingly, you are to prepare a suitable letter justifying the reasons for conversion.
The words "It need to have to file prospectus or SLP........" in my reply to your query may kindly be read as "It need not have to file any Prospectus or SLP...........".
First and foremost benefit of doing business via company is the limited liability conferred upon the company's directors and shareholders. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a Company. The unfortunate events like business failures are not always under an entrepreneur’s control; hence it is pivotal to secure the personal assets of the businessman in the event of crises.
Unlike proprietorship and partnership, if a Company becomes insolvent and is wound up, only the assets of the company are used to clear its debts. The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt and are free to carry on business.
2. Legal Entity/Status or Recognition
A private limited company is a legal entity, a juristic person established under the Act. It has its existence separate from its directors and members.
Private limited company status enables you to be taken more seriously than a proprietorship/partnership status does.
Operating as a private limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer in dealing with private limited companies than proprietorship/partnership organisations.
Easy to attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations.
3. Perpetual Succession
Another important characteristic of a private limited company is perpetual succession. It is a popular saying that the directors may come and go the members may come and go, but the existence of a company remains forever. A company once incorporated remains alive unless and until it is wound up by complying with the provisions of Law. The death, disability or retirement of any of its members does not affect the continuity of the company, irrespective of change in its membership.
There is no obligation for a Private limited company to commence business/trading within any set time period after its incorporation.
4. Project Cost and Risk Factors
For entrepreneurs going for hi-tech or high capital outlay projects it is always advantageous to go in for a company form of organisation. Where the financial stake involved is high, it is found that banks and financial institutions while sanctioning financial assistance, insist on having a private limited company.
5. Easy Transferability
Where it is proposed to sell the business as a going concern, all that is required is to transfer the entire shareholding to the purchaser and thus facilitate easy change in management and ownership. This will save time and money of the Promoters. Huge amount of stamp duty is saved.
6. Dual Relationship
In the company form of organisation it is possible for a company to make a valid effective contract with any of its shareholders/directors. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, director, creditor and employee of the company. For eg: A) As a director he can receive remuneration. B) As a shareholder he can receive dividend. C) As a lessor he can receive lease rent. D) As a creditor he can lend money and earn interest. E) As a supplier he can supply goods from his/his family business.
7. Borrowing Capacity
A company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured, accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to the company rather than partnership firms or proprietary concerns.
8. Taxation
Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax deductible costs that can be offset against a company's profits.
9. Raising Money from Public
Public Limited Companies can raise large amount of capital from the general public by issue of shares and public deposits.
Private Limited Companies can raise capital only by private placement of shares and deposits.
In reply to Mr. Tanveer's query,you have explained the features of a Ltd. Company. But he desired to know some justifications to convert a Ltd. Company into a Pvt. Ltd. Company in order to obtain 'NOC' from Bank.
For the said purpose, he will have to convince the Bank about the benfits of a Pvt. Ltd. Company as compared to a Public Ltd. Company.
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