What is a Private Limited Company?
A private limited company gives its members limited liability, allows equity to be raised easily, and ensures transparency in financials. The minimum requirement of a private Limited Company is two members, and there can be a maximum of 200 members.
The private limited company has many takers in India, with around 10,000 being registered each month. Registering a private limited company is easy. All you need is a suitable name, at least two directors who must apply for DINs and DSCs, articles and memorandum of association, and a few essential documents. The registration process, if effectively done, takes not more than two weeks.
Section 2 (68) of The Companies Act, 2013 defines a private limited company as a separate entity that is held privately and provides limited liability. It does not freely transfer its shares to the public like other public companies. In a private limited company, all business profits and liabilities belong to the company itself and stakeholders may not be responsible for debts incurred by the company
Types of private limited companies
Here are some different 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.
Unlimited companies
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.
Why Stay Private?
As the name indicates, private limited companies are not subject to the same scrutiny as their public counterparts. This is because there is no requirement to disclose accounts or publicly announce any corporate actions. And if word gets out of layoffs, for example, there is no impact on the valuation of the company, as the public has not been offered any shares in the company. So sentiment does not drive the share price. This also allows many startups to take the opportunity to make bold claims about their revenue rates and plans.
For small companies looking to grow quickly and make changes constantly, such isolation is very necessary. It allows the organisation to be nimble. With the introduction of big venture capital in India, it has become possible for companies to stay private for a very long time (close to a decade, in the case of Flipkart and MuSigma), while even spending heavily.
Who can set up and run a private limited company?
A private limited company can have a minimum of two directors and a maximum of fifteen directors. In addition, at least two shareholders can have a legal distribution of shares of a private limited company. A total number of two hundred shareholders is acceptable.
Similarly, it requires at least two directors to manage a private limited company. They can be shareholders of the company. According to Section 2 (clause 68) of The Companies Act, 2013, any private limited company may have paid-up capital of 1 lakh rupees minimum or higher, which is specified by the government.
Essential documents required for setting up a private limited company
- Memorandum of association:It talks about the purpose of setting up a business, the nature of business, the objective of a company and the capital clause. It is a corporate document, which is also called a charter of the company and defines a company’s relationships with shareholders and specifies the company’s goals.
- Article of association: This document talks about the internal operating system of the company. It explains the managing process, duties and responsibilities of each member, dividend policy, shareholder meetings and appointment of directors.
- Certificate of incorporation:It is the certificate or license that the directors receive after submitting all required documents for registration. It is the primary document of authentication of the company and the Registrar of Companies(ROC) issues this document in India.
- Other documents:Other documents include ID proof (PAN card, Aadhaar card), address proof (ration card, voter id), rental agreement, NOC from the property owner and a copy of the sale deed for the owned property for all directors and shareholders of the company
How to register a private limited company?
- Apply for a digital signature certificate.It is a digital equivalent of a physical signature and is a requirement for all directors and shareholders. Only authorised personnel can use such signatures.
- Apply for a director identification number(DIN). The Ministry of Corporate Affairs allots this 8 digit number to the person who wants to be the director of the company. It is a unique digital identity assigned to a director linked with the person’s corporate endeavours, information and services on the internet.
- Check for availability of the company name.Before registering your company, check if the name you want for the company is available for registration. You can check it on the website of the Ministry of Corporate Affairs (MCA) state business filing agency portal.
- Provide the required documents to the ROC.Once you get the approval for your company’s name, you can send all required documents to the registrar of companies (ROC). The ROC issues a certificate of incorporation and sends you a physical copy of the same.
- File the MOA and AOA.The next step is to file a memorandum of association (MOA) and an article of association (AOA). This is mandatory to register a private limited company.
5. Issue a PAN and TAN.Issue a permanent account number (PAN) and a tax deduction and collection account number (TAN) with the formation of the company. Note that the process for acquiring PAN and TAN numbers for private limited companies requires registration for GST and provident fund as well.
6. Open a bank account.This is the final step of the registration process. Open a bank account with the company’s name to carry out all the major transactions of the company.
Advantages of private limited companies
A private limited company offers the following advantages:
Opportunity for acquiring foreign investment
Foreign investors trust private limited companies more because of strict compliances, data availability on the site and the fact that they follow the ROC norms. In addition, a foreign entrepreneur can become a director of a private limited company, provided there is at least one director living in India. This makes foreign investors keener to invest in private limited companies rather than any other type of business entity.
Separate legal entity
Private limited companies are separate and independent and changes or replacements in shareholders or directors do not affect them. Any private limited company is established under a legal constitution. It means even if all members of the company leave or the company goes bankrupt, it still exists according to the law.
Can own properties
A private limited company can own any type of movable or immovable property. Assets and liabilities of the company are typically the responsibility of the company. In case of dissolution of the company, its liabilities are discharged in a specified sequence to the creditors, which
Separate Legal Entity
What it means is that the members and directors are a part of the company; however, none of their personal assets is at risk. The company can take a loan (borrow capital) under its name. However, none of the members or directors is liable in case the company is unable to repay such a loan.
Easy Transfer of Shares
The shares of the company, if any, can be transferred to any person by the shareholder. Signing away the shares and issuing a share certificate is all that is required.
Higher Borrowing Capacity
The liability of members is very much limited since the company is a separate legal entity. As for the borrowing capacity, a company can issue debentures, either secured or unsecured, accept deposits from outsiders, ask for help from financial sectors and venture capitalists, and can do much more to raise capitaluces the individual liability of the shareholders.