Starting a new business is an overwhelming process. The entrepreneur needs to make decisions about a lot of things. A successful business is not just about a good idea or an optimized process. The structure of the business, its legal identity, preparedness for future growth, and various other factors play a crucial role in its success. While a Pvt Ltd Company offers a wide range of benefits to businesses, there are many misconceptions that surround this entity. Today, we will bust five myths about a private limited company.
Myth #1. Incorporating a Pvt Ltd Company is time and Cost-Consuming
Fact:
Quite the contrary. Incorporating a Pvt Ltd Company takes less than two days! Also, there was a belief that incorporating a private limited company was costly due to the paid-up capital requirement of Rs.1 lakh. That requirement is no longer applicable making the process of company incorporation cost-efficient too. Further, with our Pvt Ltd Company registration services, you can get through the incorporation process in a simple, affordable, and hassle-free manner.
Myth #2. You will have to pay higher taxes in a Pvt Ltd Company
Fact:
Here is a quick look at the tax rates for the FY 2020-21:
Sole Proprietorship
Sole proprietorships are taxed as per the individual tax slabs as given below:
New Slab
| Income | Tax Rate |
| Up to Rs.2.5 lakh | Nil |
| From Rs.2,50,001 to Rs.5,00,000 | 5% of the total income that is more than Rs.2.5 lakh + 4% cess |
| From Rs.5,00,001 to Rs.7,50,000 | 10% of the total income that is more than Rs.5 lakh + 4% cess |
| From Rs.7,50,001 to Rs.10,00,000 | 15% of the total income that is more than Rs.7.5 lakh + 4% cess |
| From Rs.10,00,001 to Rs.12,50,000 | 20% of the total income that is more than Rs.10 lakh + 4% cess |
| From Rs.12,50,001 to Rs.15,00,000 | 25% of the total income that is more than Rs.12.5 lakh + 4% cess |
| Income above Rs.15,00,001 | 30% of the total income that is more than Rs.15 lakh + 4% cess |
Old Slab
| Income | Tax rate |
| Up to Rs.2.5 lakh | Nil |
| Between Rs.2.5 lakh to Rs.5 lakh | 5% |
| Between Rs.5 lakh to Rs.10 lakh | 20% |
| Over Rs.10 lakh | 30% |
Additionally, there is a surcharge:
- 10% of the income tax if the income range is between Rs.50 lakh and Rs.1 crore;
- 15% of the income tax if the income is above Rs.1 crore
Partnerships and LLPs
30% flat tax rate.
Surcharge:
- 12% of the income tax if the income exceeds Rs.1 crore
- 4% of the income tax including the surcharge as Health & Education cess
Domestic Companies
30% flat tax rate.
If the gross receipt in the previous year < Rs.250 crore, then the tax rate = 25%.
Surcharge:
- 7% of the income tax if the income range is between Rs.1 crore and Rs.10 crore;
- 12% of the income tax if the income is above Rs.10 crore
- 4% of the income tax including the surcharge as Health & Education cess
Hence, as you can see, taxes on a Pvt Ltd Company are not higher.
Myth #3. An audit is not needed for other business entities
Fact:
Every business structure has an audit requirement as detailed below:
Partnership & Sole Proprietorship
- Mandatory tax audit if the annual turnover of the firm in the FY exceeds Rs.1 crore
- Mandatory tax audit if the gross receipts of a professional income exceed Rs.50 lakh
LLP
- Statutory audit if the turnover > Rs.40 lakh and the capital contribution > Rs.25 lakh.
- Mandatory tax audit if the annual turnover of the firm in the FY exceeds Rs.1 crore
Company
- Statutory audit regardless of the turnover
Myth #4. A Pvt Ltd Company is not ideal for Startups
Fact:
On the contrary, the structure of a private limited company is beneficial for startups. While this myth probably originated due to higher compliance requirements and costs, the features of a private limited company are better suited to startups since they make the business more sustainable. Also, investors prefer this business structure over a proprietorship or partnership to offer seed funding.
Myth #5. The process of closing a Pvt Ltd Company is complex and takes too long
Fact:
There are times when the business owner has to wind up his business. This myth originated because of the traditional method of ‘Winding Up’ a company where you or the Court appointed an official liquidator to close the company. This process would usually take several months. However, the Ministry of Corporate Affairs (MCA) has a Fast Track Exit Scheme that allows you to strike-off your company from the register of companies in no time. There are two essential criteria for making an application under this scheme:
- The company should not have any asset or liability
- The company should not have commenced any business since incorporation OR in the last two financial years
Summing Up
The choice of business structure plays an important role in determining its future. You must ensure that you consider all aspects of your business before making this decision. Like other business structures, a Pvt Ltd Company has certain pros and cons too. Ensure that you pick one that aligns with your business requirements and stay away from the myths surrounding it. Good Luck!
