If ideas are the fuel that drives a business forward, then the entity is the vehicle that determines how far they go. For your idea to become a viable business proposition, you need to choose the right entity. Entities are like cars, you have the compact (sole proprietorship), the hatch-back (partnership), the midsize sedans (LLPs and Private Ltd) and the SUVs (Public Ltd). If you go too small by opting for proprietorship or partnership, you might not make it to the finish line; go too big by opting for an IPO and you can crash out early. LLPs and Private Limited Companies have emerged as popular choices for entrepreneurs to register their firm. Today, we take a look at what a Private Limited Company and why it’s a good fit for your company.
“Credibility is someone else’s idea of what I should be doing.” – Paul Stanley
No one wants to purchase a vehicle they don’t know about – they would like to touch it, feel it, test drive it before they decided. Like that, whether it’s your customers, creditors or investors, they are going to trust your business more if they can find information about your business easily.
In the case of a Private Limited, details such as, name of the company, date of incorporation, registered office, name of its promoters, and current status of company are made publicly available and a person can easily access the data. This brings credibility to your business and will help you to do routine business transaction like operating a current account, getting lines of credit, raising another round of investment and acquiring customer goodwill.
“An entrepreneur without funding is a musician without an instrument.” – Robert A. Rice Jr
Depending on whether the car you want to purchase is new or second-hand, how much documentation you have, you can approach different sources for funding your purchase. If your car and its documentation, stand their scrutiny, you might get the required funds, else you will be shown the door.
Funding your business is very similar – the type of entity you have will determine how much funds you get. While Proprietorship and Partnership can get limited funds, and raising funds for Public Limited company can be tedious process, a Private Limited offers a good compromise between the two. Besides institutional loans, Private Limited company can raise their own capital through equity issue to VCs, Angel Investors or even relatives and friends.
“Risk comes from not knowing what you’re doing.” – Warren Buffett
Every decision we make entails some form of risk and if we become aware of it, we can find a way to curtail it. When we purchase a car, we always buy insurance so that we can limit our losses in case of accidents or damage to the vehicle.
In business, the risk stems from the liability the owners have to bear. In case of proprietorship or partnership, the liability is unlimited and the personal assets of the owners can be attached. A Private Limited company, on the other hand, comes with the insurance of “Limited Liability” – the liability of the owners or investors are limited to the capital they have contributed and nothing more.
“Look on every exit as being an entrance somewhere else.” – Tom Stoppard
No one ever buys a car, without keeping their eye on the re-sale value. Whether you like it or not, you will have to analyse how easy it would be to sell the car even before you buy or risk being stuck with it long after your needs are over.
Entrepreneurs make the same mistake of not creating an exit plan, instead focussing only on expanding their business. There’s nothing wrong with trying to grow your company, but there will come a time when it’s too big for you to manage and you will have to exit the company and reap the rewards of your hard work – at that time, the entity you choose will play a critical role. A Private Limited Company can be easily sold, while most other entities cannot.
Choosing an entity and then running it is not the same as buying and using a car, but it happens on the same principles. If you think the right things and make the right decisions, you can surely drive your business forward.