Private Limited Company: Features, Advantages, and Formation

What is Private Limited Company?

Section 2(68) of Companies Act, 2013 defines private companies as the companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This is the essential criterion that differentiates private companies from public companies.

The Section further states that private companies can have a maximum of 200 members (except for One Person Companies). This number does not include present and former employees who are also members. Moreover, more than two persons who own shares jointly are treated as a single member.

Private Limited Company features

Earlier this definition had prescribed a minimum paid-up share capital of Rs. 1 lakh, but an amendment in 2005 removed this requirement. But now private limited company can have a minimum paid-up capital of any amount.

What are the features of Private Limited Companies?

  • No minimum capital required

Earlier, there was a requirement for minimum paid-up share capital Rs. 1 lakh but that is omitted now.

  • No. of maximum numbers

Minimum 2 members and maximum upto 200 is permissible under a private limited company.

  • Restriction on shares transfer

Private limited companies are not allowed to freely transfer their shares to the public as compared to the public limited companies. This is the reason that stock exchange do not list the private companies.

  • “Private Limited”

 All private companies must include the words “Private Limited” or “Pvt. Ltd.” in their names.

  • Privileges and exemptions:

Private companies are not allowed to freely transfer their shares to involve limited interest by members; the law has granted them several exemptions that public companies do not enjoy.

What are the types of Private Companies?

As per the member’s liabilities companies can be categorised into three categories:

  • Limited by shares: Under this circumstance, members liability is limited to the amount unpaid to the company with respect to the shares held by them.
  • Limited by guarantee: Under this, member’s liabilities are limited to the amount of money they guarantee to pay in case of company windup.
  • Unlimited liability: Here the liability of members is unlimited and personal assests can be seized and sold during the process of company winding up.

What is the Private Company Registration Process?

Private Company Registration Process

Digital signature of director

The process starts with making the digital signature certificate of Class 3 of all the directors for signing the forms during MCA incorporation process.

Company name approval

The name suggested by the client needs to be checked and name approval form is being filed before proceeding with the incorporation documents.  Therefore, it is advisable to choose the unique name to reduce the chances of rejection for the name approval.

Company incorporation

Once the required list of documents is collected from client, incorporation form needs to be filed through online process by furnishing all details of proposed company and directors. After scrutiny process from the MCA, you will receive the certificate of incorporation.

Bank account

Current bank account needs to be opened once your certificate of incorporation is issued.

Commencement of certificate

After current account opening, business commencement form needs to be filed within 30 days of incorporation by furnishing the bank details in the form. If you miss this first compliance, then you have to face heavy penalties for non filing.

How Formation of Private Companies takes place?

Formation of private company requires minimum 2 and maximum of 200 members can come together by submitting an application to that effect to the Registrar of Companies along with a subscribed copy of their Memorandum of Association and other required documents after payment of prescribed fees.

The Memorandum must specify the name of the company (which should include the words “Private Limited”), the address of its registered office, its objects and purposes, and extent of liability of its members. It must mention the details of subscribers to the Memorandum.

Also, the Companies Act has stated certain other compliances, such as requirements relating to names of private companies, their Articles of Association, details of members, transferability of shares, etc.

Recently, in the month of August 2022, the government has changed regulations to provide a transparent process for the physical verification of the registered office addresses of firms, including the use of independent witnesses during the verification. Under the Companies Act 2013, a Registrar of Companies (RoC) may conduct a physical verification of a company’s registered office if he or she has reasonable grounds to suspect that the company is not conducting business in an appropriate manner.

Under the Act, the procedure for such physical verifications has been established. The physical verification will be conducted in the presence of two impartial witnesses from the area where the registered office of the firm is located.

The local police will also be contacted if necessary, according to the corporate affairs ministry. During the physical verification, the registrar will also be required to snap a photograph of the company’s registered office.

What are the advantages of Private Companies?

The Companies Act has given certain benefits and exemptions to private companies that public companies do not possess. These benefits accord them greater freedom in conducting company affairs. Here are some examples of them:

  1. Limited Liability: The shareholder liability is limited as per his shareholding.
  2. Pull in Funding: It is comparatively easy to attract investors.
  3. TEAM Building: By offering stocks and proprietorship to the worker’s gifts can be held. This procedure is based on a scaling where stock offering holds abilities.
  4. Validity Improvement: As it is registered as a corporate body the credibility is enhanced, and it builds trustworthiness in the market.
  5. Continuity: Even after the demise and exit of any investor, the firm proceeds, and its reality is protected.
  6. Foreign Direct Investment: It takes into account coordinate foreign deposits/ investments through a simple channel.

What are the disadvantages of Private Companies?

  1. Registration Process: The Registration Process is as per rules and regulations of the MCA.
  2. Compliances: Private limited company has to follow and fulfil compliances as per companies act, Income Tax Act, Non-compliances attracts heavy penalties.
  3. Cannot be listed: In stock trade shares can’t be cited, i.e., the posting of the organizations for the first sale of stock isn’t conceivable.
  4. Division of Proprietorship or Ownership: A noteworthy hindrance of a private restricted organization is that it requires at least 2 executives and investors for its consolidation, which prompts the division of offers.
  5. Restricted Shareholders: In a Private Limited Company the number of investors or individuals cannot exceed the upper limit as defined in company Law.

How much time it will take for incorporation a Company in India?

We can incorporate a Pvt. Ltd. Co. in India within the time frame of two to six weeks. Also it will depend upon submission of relevant documents by the client and speed of Government Approvals.

For completing registration without any delay, please choose a unique name of your Company and ensure that you have all the required documents prior to starting the registration process.

Is Foreign National or NRI can be a Director in a Private Limited Company?

Yes, a Foreign National or an NRI can be a Director in a Private Limited Company in India after obtaining DIN. At least one Director on the Board of Directors must be a Resident in India.

Comparison Chart

BASIS LLP Pvt. Ltd. Co. One Person Company Partnership Firm Sole Proprietorship
Suitable for Firms such as accountancy, legal and architecture Business with projected growth which requires additional funding for expansion Sole owner who wants to run corporate business Traditional business Individual person with minimum risk factor
Liability Limited Limited   Limited Unlimited liability Unlimited liability
Continuity of business Yes Yes Yes No No
Tax benefits Most efficient High benefits High Benefits Minimal Minimal
Cost of Registration Lower rate of government fees Cost is higher than LLP Comparatively less Comparatively less Comparatively less
Ownership  Status Corporate Entity Corporate Entity Single Person Corporate Entity Partner Based Individual Base
Compliance Less compliances Requires more compliance Minimal Minimal Minimal
Foreign Ownership   Allowed with approval of RBI & FIPB Allowed under Automatic Approval route Not allowed No FDI is allowed Not allowed
Number of Directors 2- unlimited 2-15 1-15 Not applicable Not applicable
Number of Members 2- unlimited 2-200 1 2-20 1
Transfer for Ownership Transferable with consent of all partners Easily Transferable Easily transferable Not possible Not applicable

Therefore, if you are planning to incorporate a private limited company then complete your analysis first as explained above to know exactly which type of company you should incorporate.

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