Private Limited Company
A private company is a company which is owned by non-governmental organisations or a relatively small number of shareholders or members of a company. Usually, a private company does not offer or trade its shares to the general public on the stock exchanges, but rather the private stock of the company is owned and traded.
Types of Private Limited Companies
Private Limited company by shares
A private company limited by shares is limited in capital based on the numbers of shareholders who are owed money on their shares. For these companies, the liability of shareholders is limited by the MOA (memorandum of Association) to the number of their shares or the amount which remains unpaid. The shareholders are not liable to pay more than their share capital invested in the company.
Private Limited company by guarantee
In a private limited company limited by guarantee, the liability of the individual shareholder is limited to the amount he guarantees in the MOA. Therefore, they can be liable only up to the amount that they have guaranteed. In addition, they may invoke this guarantee only in case the company is permanently shut down.
An unlimited company is a separate legal entity. Unlimited corporations are businesses that have no restrictions on the liability of their members. Each member's liability may extend over the entire company's debts. It means members' personal assets can pay off debts incurred by the company.
Characteristics of a Private Limited Company:
Limited Liability Protection:
One of the most appealing aspects of a Private Limited Company is the limited liability protection it offers to its shareholders. Shareholders are only liable to the extent of their shareholding. In other words, their personal assets are not at risk in the event of financial losses or legal issues faced by the company. This separation between personal and business assets provides significant peace of mind to the shareholders.
Separate Legal Entity:
A Private Limited Company is recognized as a separate legal entity distinct from its owners. This legal recognition means that the company has its own identity, and it can enter into contracts, own property, and sue or be sued in its name. This separation of legal identities between the company and its shareholders is a fundamental characteristic of this business structure.
Shareholders and Directors:
A Private Limited Company must have a minimum of two shareholders and a maximum of 200 shareholders. Additionally, it must have a minimum of two directors, one of whom must be an Indian citizen. This flexibility in the number of shareholders and directors allows businesses to start small and scale up as needed.
Minimum Share Capital:
Although the Companies Act of 2013 no longer mandates a specific minimum share capital, many Private Limited Companies start with a minimum paid-up capital of Rs. 1 lakh or a higher amount as prescribed. This capital requirement can vary based on the business's needs and plans.
The name of a Private Limited Company must end with the words "Private Limited." This naming convention helps distinguish private limited companies from other types of businesses.
Restrictions on Share Transfer:
In a Private Limited Company, the transfer of shares is restricted. Shares can only be transferred with the approval of the Board of Directors or following the company's Articles of Association. This restriction helps maintain the control and privacy of the business.
Prohibition on Public Invitation:
Private Limited Companies are not allowed to invite the public to subscribe to their shares or debentures. They cannot issue a prospectus to the public. This restriction differentiates them from public companies, which can raise funds from the general public.
Private Limited Companies must comply with various legal and regulatory requirements, including maintaining proper books of accounts, conducting annual general meetings, and filing annual returns with the Registrar of Companies. These compliance requirements ensure transparency and accountability in the company's operations.
Requirements to Start a Private Limited Company:
Shareholders and Directors:
You need a minimum of two shareholders to start a Private Limited Company, with a maximum of 200 allowed. Additionally, a minimum of two directors is required, one of whom must be a resident of India. Directors must obtain a Digital Signature Certificate, Director Identification Number, Permanent Account Number (PAN), and Tax Deduction and Collection Account Number (TAN).
Company Name Approval:
The proposed name of the company must be unique and approved by the Registrar of Companies (ROC). It should not resemble any other registered company name. Selecting a distinct and relevant name is crucial, as it forms the company's brand identity.
Registration with Other Authorities:
Depending on your business activities, you may need to register with other authorities such as the Goods and Services Tax (GST) department, Employee Provident Fund (EPF) department, and Professional Tax department, among others.
Compliance with Legal Requirements:
Private Limited Companies must adhere to various legal and regulatory requirements, including maintaining proper books of accounts, conducting annual general meetings, and filing annual returns with the ROC. Staying compliant ensures that the company operates within the framework of the law.