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Initially, many entrepreneurs start their businesses as sole proprietorships. When a business expands, it becomes necessary to transform it into a Private Limited Company to minimize liability and separate an individual's bank accounts and tax filings. A Private Limited Company has several advantages over a sole proprietorship, including limited liability, the potential to attract equity capital, and the ability to continue operations among others.
A proprietorship, often known as a sole proprietorship, is a type of business owned and operated by one person, with no legal distinction between the owner and the business entity. The proprietor (the owner of a business, or a holder of property) is entitled to all earnings and is personally liable for all debts, losses, and liabilities. On the profits earned from the business, the owner pays personal income tax.
A Private Limited Company, on the other hand, is a privately held firm for small businesses. A member's liability in a Private Limited Company is limited to the number of shares they own. A corporation must pay corporation tax on whatever profits it makes and then distribute the remainder to shareholders. A Private Limited Company's shares cannot be traded publicly. Any type of business, such as a photographer, lawyer, dentist, accountant, and so on, can register a Private Limited Company. Shareholders are the proprietors of a Private Limited Company.
A Private Limited Company has several advantages over a sole proprietorship. They are:
To convert a sole proprietorship into a Private Limited Company, the following prerequisites must be fulfilled:
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