Choosing the appropriate business structure is essential when launching a new company. It allows you to streamline and expand your business processes. If you have a business idea and wish to start a business in India, you are required by law to register your firm as a particular form of company. One of the types of companies that can be registered under the Companies Act of 2013 is a private company. A private company in India is a business entity defined by the Companies Act 2013, which sets specific rules regarding its formation, governance, and the maximum number of members it can have. If you want to learn more about creating a private limited company, this comprehensive guide includes all you need.
Let’s begin with the definition of a private company.
What is Private Company?
A private limited company is a legally recognised business entity that is privately held and owned by private stakeholders. A private company in India is a business entity defined by the Companies Act 2013, which sets specific rules regarding its formation, governance, and the maximum number of members it can have. Section 2(68) of the Companies Act 2013 defines the legal phrases applicable to this sort of corporation. According to this definition, private firms are those whose articles of association limit the transferability of shares and prohibit the general public from subscribing. This is the fundamental distinction between private and public companies. Additionally, it ensures financial transparency and minimises shareholder liability (in relation to the number of shares held by them).
You should also be aware of:
- Private limited corporations can be further subdivided into limited by shares, limited by guarantee, and unlimited firms.
- It can have no more than 200 members, as stipulated in the Companies Act 2013.
- A minimum of two directors are required to form a private limited company.
How a Private Company Works?
A private company, also known as a privately held company, is a business entity owned by private individuals or groups and is not publicly traded on a stock exchange. In India, a private company is governed by the Companies Act 2013, which sets the rules regarding its operations, governance, and the maximum number of members it can have, capped at 200. This limitation on the maximum number of members in a private company ensures that it remains closely held, with less regulatory scrutiny compared to public companies.
There are several types of private companies, including sole proprietorships, limited liability corporations (LLCs), and companies limited by shares or guarantees. Each type has distinct shareholder, member, and taxation regulations. In India, private limited companies are required to have a minimum of two directors. They may choose between being limited by shares, limited by guarantee, or an unlimited company, each with different rules regarding liability and capital requirements.
Private companies can face challenges when it comes to raising capital due to the restriction on the number of shareholders and the inability to trade shares publicly. While private companies have access to bank loans and certain types of equity financing, going public through an Initial Public Offering (IPO) allows them to raise substantial capital by offering shares to the general public. However, many private companies prefer to remain private to maintain greater control and avoid the extensive regulatory requirements that come with being a public company.
In India, the definition of a private company in the Companies Act 2013 emphasises limited liability for shareholders and restrictions on share transfers. These factors, combined with the ability to operate with fewer compliance requirements than public companies, make private companies an attractive option for many small and medium-sized enterprises (SMEs) in the country.
Features of Private Company
These features distinguish private firms from other forms of organisations:
1. No minimum capital is required
The former minimum paid-up share capital requirement of Rs. 1 lakh has been eliminated.
2. Members
A private corporation can have as few as two members (or only one in the case of one person company) and as maximum as 200 members.
3. Restricted transferability of shares
Private corporations cannot freely transfer their shares to the general public, as public corporations can. Stock markets never list private companies for this reason.
4. “Private Limited”
Every private company must include “Private Limited” or “Pvt. Ltd.” in its name.
5. Dispensations and exemptions
Since private firms cannot freely transfer their shares and their members have limited interest, the law has allowed them various exemptions that are not available to public companies
6. Residential status
One of the people in charge must be an Indian citizen. The remaining directors may be foreign nationals.
7. Limited liability
As each member’s responsibility is restricted, his or her personal assets will not be used to cover the company’s debts in the event of financial hardship.
8. Foreign Direct Investment (FDI)
Any foreign business or individual can directly invest in a private company, as 100% FDI is permitted.
9. Credibility
The company’s information is published in a public database, which enhances its credibility by facilitating the authentication of the information.
Types of Private Companies
There are three sorts of private corporations based on their members’ liabilities:
1. Limited by shares
The members’ responsibility is limited to the amount owed to the firm in relation to the shares they own.
2. Limited by guarantee
Here, the members’ liabilities are restricted to the amount of money they have guaranteed to pay if the company is liquidated.
3. Unlimited liability
In these types of private corporations, members’ liability is unlimited. Personal assets of members are subject to attachment and sale during the dissolution of the company.
Further, a private corporation can also be a one-person company, based on the number of its members. The promoter of these companies is a single member or stakeholder. The 2013 companies act introduced these types of corporations.
Under Indian company law, even small companies with limited paid-up share capitals and turnover quantities, as stated by Section 2(85), are considered private companies.
Formation of Private Companies
A minimum of 2 and a maximum of 200 members can form a private company by submitting an application to the Registrar of Companies (RoC) along with a signed copy of their Memorandum of Association (MoA) and Articles of Association (AoA) as well as other required documents and the payment of the stipulated fees. The Companies Act 2013 governs the formation process, ensuring that all private companies in India adhere to specific legal standards and procedures.
The Memorandum of Association must include:
- The company’s name must consist of “Private Limited” as a suffix.
- The registered office address of the company.
- The objectives and purposes of the company.
- Members’ liability to the organisation.
- Subscribers’ names are listed in the memorandum.
Additionally, the Articles of Association define the internal regulations and management of the company. Both the MoA and AoA must be submitted during the registration process.
Critical Steps in the Formation of a Private Company in India:
- Reservation of Name: The proposed company name must be unique and not identical or similar to any existing company. Any trademarks should also not be violated by the name. It is necessary to obtain approval from the Ministry of Corporate Affairs (MCA).
- Preparation of Legal Documents: The MoA, AoA, and other necessary documents like the Digital Signature Certificates (DSCs) of the directors and subscribers, Director Identification Numbers (DINs), and a declaration by a professional (Chartered Accountant, Company Secretary, or Cost Accountant) are prepared and signed.
- Filing of Application: An application is submitted to the Registrar of Companies (RoC) through the MCA portal. The application must include the MoA, AoA, a declaration of compliance, affidavits from directors, and proof of the registered office address.
- Issuance of Certificate of Incorporation: Upon verification of the documents and approval from the RoC, a Certificate of Incorporation (COI) is issued, legally recognising the company as a private limited company under the Companies Act 2013.
Additional Compliance Requirements:
The Companies Act 2013 also prescribes various other compliances, such as:
- Articles of Association: Governing the internal management and rules for company operations.
- Member Information: Details of all the members and shareholders.
- Transferability of Shares: Restrictions on the transfer of shares to maintain the company’s private status.
- Meeting and Reporting Requirements: Regular board meetings, annual general meetings (AGMs), and financial statement submissions are mandatory.
Definition of Private Company in Companies Act 2013:
The Act defines a private company as one which, by its articles, restricts the right to transfer its shares, limits the number of its members to 200, and prohibits any subscriptions by the general public.
By adhering to these requirements, a private company in India can be formed and legally operate, offering limited liability and a more flexible management structure than a public company.
Privileges of a Private Companies
The companies act has given private companies certain rights and exemptions that public companies do not have. These rights give them more freedom in how they run their businesses. Here are some examples of them:
- No need to prepare a report for annual general meetings.
- Only 2 minimum directors are required.
- No need to appoint independent directors.
- They can come up with more reasons why a board member should be removed from office or disqualified.
- They can pay their directors a higher salary than some other types of companies.
Limitations of Private Companies
A private limited company is the best business entity for the vast majority of medium and large businesses since it provides a variety of benefits, including liability protection and simple transferability. However, functioning as a private company is not the best choice for all organisations, particularly micro or small businesses. Let’s examine the downsides of a private company.
1. Registration process
Registration of a private limited company typically takes 10 to 15 days and costs more than 10000. Consequently, registering a limited liability company includes a procedure and expenses that do not apply to unregistered entities such as sole proprietorships. However, once incorporated, a private company enjoys a wide range of powers and rights, making the process of opening a bank account or acquiring a payment gateway straightforward. As unregistered business entities, sole proprietorships and partnerships frequently meet difficulties when attempting to open a bank account or obtain a payment gateway following registration.
2. Compliance procedures
Post-incorporation, a private company must adhere to a number of regulations. Each year, all corporations must hold board meetings, and general meetings, have their financial statements audited, keep a statutory register, and file an annual return with the Ministry of Corporate Affairs. In addition to corporate compliance requirements, a corporation must also maintain compliance with tax and labour rules, which apply regardless of the business entity structure.
3. Division of ownership
Private limited companies have the significant drawback of requiring a minimum of two individuals to serve as directors and shareholders. Therefore, a sole proprietor who desires to establish and run a firm alone cannot form a limited liability company. Therefore, any big business decision would always require the approval of two individuals. Even if one shareholder holds a minor quantity of stock, the corporation must have at least two stockholders.
4. Personal liability
The firm bears full responsibility for its debt and has infinite liability. Members of a firm are the only ones who receive limited liability protection. However, in the following instances, directors and members would also be personally liable:
When the company’s name is misspelled in an act or contract, people who actually performed the act or entered into the contract are personally accountable.
When a company’s operation has been conducted with the intent to mislead its creditors during its liquidation, anyone who knowingly participated in such conduct is personally liable for the company’s debts.
5. Closing of a company
Compared to an unregistered partnership, the procedure for dissolving a company can be more difficult, time-consuming, and expensive. Therefore, it is crucial to forming a company only when the founders intend to use it to do business.
Examples of Private Limited Companies
1. Rajiv co-owns a clothing store with his two brothers. They wanted to broaden their business by establishing a clothing manufacturing firm. In this regard, they are experiencing some financial challenges.
For instance, their collective capital is only Rs. 80,000. In addition, they aim to minimise their responsibilities due to their financial deficiencies. Can they start a private company under these circumstances?
Answer: In such circumstances, Rajiv and his brothers can certainly incorporate a company. Although the companies act originally required minimum capital of Rs. 1 lakh, this condition has been eliminated. Regarding the second criteria, clients might choose between a limited by shares or a limited by guarantee firm.
2. Describe briefly the steps Rajiv and his brothers will need to take to establish their company.
Answer: First, they must file a completed application with the registrar of companies together with the required costs. This application must be supported by the company’s memorandum and articles of association. This memorandum will have information like the name of their company, which will be followed by “Pvt. Ltd.”, objectives, office address, etc.
The act then compels people to disclose their personal information to the Registrar. The firm will become active after the Registrar issues them a certificate of incorporation.
Conclusion
Even though a private limited company is one of the best types of companies for small and medium-sized businesses that are family-owned or managed by professionals, compliance requirements are not to be taken lightly. From a business point of view, it takes time and work, and you need to know a lot about money as well. In addition to the above, if you want to make sure you’re following the rules, you have to make sure you’re following the companies act 2013 and any other relevant rules. If you don’t, you’ll have to pay a lot of money.
If the company is compliant, it would be a big plus for the company because it would give the company a competitive edge and build trust and confidence among all of the people who deal with the company. Compliance can’t be treated like “checking a box”; instead, you have to do the right thing according to the rules. It’s important to remember that the cost of not following the rules is always more than the cost of following the rules. Private companies could get help from professionals who are qualified to do so. These professionals would help the company at each stage of its business cycle, starting with incorporation and going forward. This way, the company could make sure it was following all the rules.
FAQs
1. What is the meaning of a Private Company?
Ans: Section 2(68) of the companies act, 2013 defines the legal phrases applicable to this sort of corporation. According to this definition, private firms are those whose articles of association limit the transferability of shares and prohibit the general public from subscribing.
2. Is a Private Company better than a public business?
Ans: Private companies have an advantage over public companies when it comes to investing in long-term strategies, keeping the values of their shares and financial numbers private, and running their businesses with freedom and flexibility.
3. What is the maximum number of members in a Private Company?
Ans: In a private company, there must be at least 2 directors and 2 members. All of these members have limited liability, and the maximum number that can be in the group has gone up from 50 to 200.
4. How much does it cost to start a Private Limited Company?
Ans: Setting up or registering a Pvt Ltd company usually costs different amounts, depending on the number of Directors, members, authorised share capital, and professional fees.
5. Is starting a Private Limited Company better than starting an LLP?
Ans: Both of these kinds of businesses have pros and cons. When it comes to long-term investments, many people think that a private limited company is better than an LLP. Before you register your company, you should know how the two are different.
6. What is compulsory for a Private Limited Company?
Ans: All private limited companies are required to have an annual general meeting within six months of the end of their financial year. Section 134 describes this.
