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.
  • 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 companies can have a minimum paid-up capital of any amount.

What are the features of Private Limited Companies?

  • No minimum capital required

There was a minimum paid-up share capital requirement of Rs. 1 lakh previously, but that is omitted now.

  • Minimum 2 and maximum of 200 members

A private company can have a minimum of just two members (but just one is enough if it a One Person Company), and a maximum of up to 200 members.

  • Transferability of shares restricted

Private companies cannot freely transfer their shares to the public like public companies. Due to this reason stock exchanges never list 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?

There are three types of private companies depending on members’ liabilities:

  • Limited by shares: The liability of the members is limited to the amount unpaid to the company with respect to the shares held by them.
  • Limited by guarantee: Here the members’ liabilities are limited to the amount of money they guarantee to pay in case the company is wound-up.
  • Unlimited liability: The liability of members is unlimited in this type of private companies. Personal assets can be seized and sold when the company is being wound-up.

Also, the small companies having limited paid-up share capitals and turnover amounts, as defined under Section 2(85), are treated as private companies under Indian company law.

What is the Private Company Registration Process?

  • Digital signature of director

Company Incorporation application is filed online and the process starts with the issuance of Digital Signatures of class two.

  • Company name approval

The Company name should be unique and not be the same or similar to an existing company, LLP or a trademark.

  • Company incorporation

For incorporation of the company one single application (spice 32) is filed with the approval, and the Certificate is issued.

  • Bank account

 The next step is Bank A/c opening.

  • Commencement of certificate

After the opening of bank account and transfer of share capital, commencement of certificate is applied to start the business.

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.

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:

  • Limited Liability: Liability of Shareholder is limited
  • Pull in Funding: It is comparatively easy to attract investors.
  • 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.
  • Validity Improvement: As it is registered as a corporate body the credibility is enhanced, and it builds trustworthiness in the market.
  • Continuity: Even after the demise and exit of any investor, the firm proceeds, and its reality is protected.
  • Foreign Direct Investment: It takes into account coordinate foreign deposits/ investments through a simple channel.

What are the disadvantages of Private Companies?

  • Registration Process: The Registration Process is as per rules and regulations of the MCA.
  • Compliances: Private limited company has to follow and fulfil compliances as per companies act, Income Tax Act, Non-compliances attracts heavy penalties.
  • 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.
  • 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.
  • 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.

Is it necessary for foreign director to be present at the time of incorporation?

No, director is not required to be present in India at the time of incorporation. But all the incorporation documents with ID and address proof must be noatrised and apostilled. If a foreign director has a valid multiple entry Indian visa or person of Indian origin or overseas citizen of India Card, then attestation could also be done by Public Notary/ Gazetted officer in India if the person is present in India at the time of incorporation. 

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

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