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Why are companies a better form of business?

Why are companies a better form of business?

It’s because of the below mentioned characteristic features that the Companies turn out to be a better form of business

Limited Liability

The primary benefit of undertaking business in the form of a company is the limited liability benefit given to the company’s management.

If it’s a sole proprietorship or partnership business then in that case if things go wrong and business fails then the personal assets of the proprietor or partners will come at risk for paying of the business liabilities, but this is not the case for a Company.

Unfortunate instances like business failures are under any control; thus it is very essential to secure the personal assets of the businessman in the event of such crises.

Legal Entity/Status or Recognition

A private limited company is a legal entity, a juristic person established under the Act. Its existence is separate from its directors and members.

Operating as a private limited company gives suppliers and customers a sense of confidence in a business. Large organizations prefer in dealing with private limited companies than proprietorship/partnership organisations.

Private Limited Company can easily attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations.

Perpetual Succession

Another important feature 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 in existence 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

Project Cost and Risk Factors

For entrepreneurs going for hi-tech or high capital outlay projects it is always beneficial to go in for a company form of organisation. Where the financial stake is high, it is found that banks and financial institutions while sanctioning financial assistance, insist on having a private limited company.

Easy Transferability

Where it is proposed to sell the business as a going concern, it is required is to transfer the entire shareholding to the purchaser and hence facilitate easy change in management and ownership. It saves time and money of the Promoters. Huge amount of stamp duty is also saved.

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 example:

• As a director he can receive remuneration.
• As a shareholder he can receive dividend.
• As a lessor he can receive lease rent.
• As a creditor he can lend money and earn interest.
• As a supplier he can supply goods from his/his family business.

Borrowing Capacity

A company enjoys better avenues for borrowing of funds. It can issue secured as well as unsecured debentures, accept deposits from the public, etc. Banking and financial institutions also prefer to render large financial assistance to the company rather than partnership firms or proprietary concerns.

Taxation

Income tax is paid by sole traders and partnerships. 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.

Raising Money from Public

Public Limited Companies can raise large amount of capital from the general public by issuing shares and public deposits. Private Limited Companies can raise capital only by private placement of shares and deposits.

Team TaxReturnWala:

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