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Benefits of incorporation / limited liability

A limited company is a legal entity, which in the eyes of the law, is a separate “person”. The basic principle means that a company can hold assets in its own right, conduct business, employ people, it can sue and be sued in its own name.

In recent years the company formation industry in India has changed immeasurably. The growth of agents and professionals offering formation services into the market and the increased demand for these services has led to lower prices and severe competition for business. Many agents and professionals now offer very low prices in terms of professional fees, but savings at the time of incorporation can easily lead to higher costs later on.

There are many benefits to incorporating your business regardless of its size. Advantages of forming a Company or Limited Liability Partnership (LLP) include:

  1. Personal asset protection:Both Company and LLP allow owners to separate and protect their personal assets in the event of a lawsuit or claims levelled against a business entity. In a properly structured and managed company, owners should have limited liability for business debts and obligations. This remains one of the biggest benefits to incorporating.
  2. Additional credibility:If you were to list one or two of the chief benefits of incorporating your business, one of the top reasons would be the instant credibility afforded your businesses following incorporation. Adding “Private Limited” or “Limited” or “LLP” after your business name can add instant authority. Consumers, vendors and partners may prefer to do business with an incorporated company.
  3. Name Protection:Other businesses may not file your exact corporate or LLP name in the same or a different state. Not only can this help protect your company’s reputation from being diminished by or confused with another company with similar sounding name, but this is also one of benefits of incorporating that aids your business in terms of name-recognition, marketing and branding efforts.
  4. Perpetual existence:Corporations and LLPs continue to exist even if ownership or management changes. Sole-proprietorships and partnerships just end if owner dies or leaves the business. Forming a company ensures that your company’s legacy can remain, as well as continue to provide employment and services for clients should any changes in ownership occur.
  5. Transfer/sale of business:Where at any point of time, it is proposed to sell the business as a going concern, owners can do this by just transferring their entire shareholding to the purchaser and thus facilitate easy change in management and ownership. This will save time and money of Promoters. Also huge amount of stamp duty is saved.
  6. Increased borrowing capacity:There are better avenues for borrowing of funds. In addition to bank borrowing, a company can borrow funds via issue of debentures – secured as well as unsecured, accept deposit from public etc. Further, banks and financial institutions prefer to offer large financial assistance to an incorporated entity in comparison with an un-incorporated entity like partnership and sole-proprietorship.
  7. Taxation:Sole traders and partnership concerns pay income tax whereas Companies pay corporation tax on their taxable profits. There are several tax advantages and benefits of incorporating a business as there is a wider range of allowances and tax deductible costs that can be offset against a company’s profits.
  8. Public Issue: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.