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6 Reasons A Startup Should Opt For Incorporation

6 Reasons A Startup Should Opt For Incorporation

Private limited companies are a significant part of any developing economy and are the most popular form of business entity.

Recently, incorporation of Private Companies in India has seen significant growth with the introduction of Companies Act, 2013 which has made incorporation comparatively easier. Moreover, the concept of One Person Company has also come for individuals who want to keep ownership of the entity with them. Generally, a Private Limited Company is managed by the shareholders themselves or they hire Directors to run the company on their behalf. So let’s now focus on benefits of incorporating a private company as a startup.

Raising Funds

Finance is a core part of running a business. A private company can raise funds through loans, deposits or capital. Even venture capitalists are a handy option in raising funds. Only a private limited company can raise funds through venture capitalists, as LLPs would require investors to be partners and OPCs can have only one shareholder. With better options available for growing business, many new private limited companies are easily competing with the larger companies.

Capital Requirements

The requirement of INR 1 Lakh as minimum subscription amount has been done away with, in the Companies Act, 2013. Thus, there is no burden to infuse a huge amount, as previously required, into the company bank account and one can be formed with no capital. Since capital is a major requirement to run a company, it can be increased in the future as well. A private company, unlike a public company, can allot new issues to other persons as well.

Shareholders And Directors

Shareholders are the owners of the company and they possess many rights in the company.  They can be any person including Foreign Companies but in the case of OPC only a natural person can be the Shareholder of the company. For the formation of a Private Company – a total number of minimum 2 and maximum 200 shareholders and under OPC even with 1 shareholder a company, can be incorporated.

The minimum number of directors required is 2. An individual, as a shareholder of the company, can also be the Director of the Company. But this Privilege is not enjoyed by a body corporate i.e. a body Corporate can only act as a director in the company. Moreover, 1 Director must be a resident in India.

Business Credibility

A private company is registered under The Ministry of Corporate Affairs and the details are available on the website of the ministry to view. Therefore, one can know about the details of the company.  Now EForm SPICe (INC-32) has been introduced which deals with a single application for reservation of name, incorporation of a new company, application for allotment of DIN and/or application for PAN and TAN.

This eForm is accompanied by supporting documents including details of Directors & subscribers, MoA, and AoA etc.  Name availability, allotment of Director Identification Number (DIN), company incorporation and commencement of business will now be possible through a single form. Many exemptions has also been allotted it i.e. exemption from issuing prospectus before any issue of new shares, loan to directors, disclosures by an interested directors.

Healthy Workplace

Employees are a company’s best asset.  A private company generally aims to create good work environment so as to improve their productivity, build a strong organisational culture, organise various training and development programmes that supports the employees, in turn, the company itself. These days, employees also contribute in making important decisions, contribute to the company’s success and assume responsibility for results. Of the benefits provided, stock ownership is one of the most valued benefits. Employees who have stock ownership feel that they are a part of the business.

Exit Plan

Exit planning is a process by which all strategic options available to a business owner which includes succession planning and sales strategies are explored. Private limited companies can easily be sold or transferred, either partially or in full, to another individual or entity without any harassment.


Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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