As a business develops, the demands of the business world and the downsides of sole ownership could constrain its growth and development. This is why many entrepreneurs opt for converting sole proprietorship into a private limited company.
It has significant advantages over other types of ownership structures, such as limited liability, the ability to attract additional funding, perpetual succession and so on.
You must consider the following key areas before deciding to convert your sole ownership to a private limited company:
In the case of sole proprietorships, the proprietor and the business are one and the same under the eyes of the law. Although sole proprietors enjoy the benefit of self-governance over their business activities, they are personally responsible for all risks involved in their business. On the other hand, a private limited company is a separate and individual legal entity. It has its own assets and liability, it can be sued or can sue, purchase or dispose of the property.
Unlike a sole proprietorship, shareholders’ liability in a private limited company is restricted to the amount of their shareholding. Except in cases of fraud, the personal assets of shareholders are never acquired to settle the company’s debts.
In the case of a sole proprietorship, loan providers may sue the proprietor and seize his assets and property for the obligations of their business. As a result, a sole proprietor is more likely to face total financial devastation than a shareholder in a private limited companies.
Private limited companies enjoy corporate tax benefits, where taxes are levied on profits instead of income. On the other hand, a sole proprietorship not being a corporate entity cannot take advantage of the corporate taxation structure’s exemptions and benefits.
Sole proprietorships lack suitable fund-raising options, but private limited companies benefit from numerous fund-raising avenues. Private limited entities would have little trouble raising cash from a wide range of sources compared to a sole proprietorship. Banks are more willing to give loans to a private limited company than a sole proprietorship.
Unlike a private limited company that enjoys perpetual succession, the legal permanence of a sole proprietorship is determined by the proprietor’s life span. As a result, retirement or death will result in the dissolution of the proprietorship. This means that heirs interested in inheriting and running the business will be unable to do so.
Sole proprietorships have difficulties networking and collaborating on a larger scale due to the fact that their reputation isn’t as credible as it would be if they operated a larger company structure, such as a private limited company.
Furthermore, sole proprietorships find it increasingly difficult to attract high-value employees who are qualified and capable. This is because prospective employees recognize the limited scope for expansion inherent in the business structure.
Compliance formalities and requirements of a private limited company are a lot higher than those of sole ownership. This is because the laws, regulations, and guidelines under the Companies Act, 2013 govern the operation of private limited companies. However, the credibility that corporate entities enjoy on account of meeting the compliance requirements, make the administrative burden worth the trouble.