What is a Private Limited Company?
A private limited company is a privately held business entity held by private stakeholders. The liability arrangement, in this case, is that of a limited partnership, wherein the liability of a shareholder extends only up to the number of shares held by them.
With the startup ecosystem booming across the country and more and more people looking to do something on their own, there is a need to be well-acquainted with different business registration types i.e sole proprietorship, limited liability company, and private limited company.
In legal terms, Section 2 (68) of the Companies Act, 2013 defines a private company as:
“A Company having a minimum paid-up share capital as may be prescribed, and which by its articles,— (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred; (iii) prohibits any invitation to the public to subscribe for any securities of the company.”
In this article, we will talk about different sides of a private limited company.
Private companies have the upper hand over public companies with respect to investment in long-term strategies, keeping the values of their shares and financial figures discreet, freedom, and flexibility of operations.
Characteristics of a Pvt Ltd Company
Now that you know what a private limited company is, the next step is to know the characteristics of such a company:
- Membership: Like any other company, a minimum of two shareholders are required in order to start such a company. But since it remains a small entity, there is also a maximum cap on the number of members fixed at 200. There is also a requirement of two directors to run the company
- Limited liability structure: In a private limited company, the liability of each member or shareholder is limited. Therefore, even in the case of loss under any circumstances, the shareholders are liable to sell their own assets for repayment. However, the personal and individual assets of the shareholders are not at risk
- Separate legal entity: This is a separate legal entity and continues in perpetual succession. This means that even if all the members die, or the company becomes insolvent or bankrupt, the company still exists in the eyes of the law. The life of the company will be perpetual, not affected by the lives of its shareholders or members unless dissolved by way of resolution
- Minimum paid-up capital: A private limited company requires to have and maintain a minimum paid-up capital of Rs. 1 lakh. It could go higher, as prescribed by MCA from time to time
Requirements to start a Private Limited Company
Every business type has its own set of requirements before it is incorporated. The requirements for registering this are as stated below:
Members and directors: As mentioned above, to get itself legally registered, a private limited company must show a minimum number of two and a maximum number of 200 members. This is a statutory requirement as mandated by the Companies Act 2013.
The directors should meet the following conditions:
- Each of the directors should have a DIN i.e. director identification number, which is given by the Ministry of Corporate Affairs
- One of the directors must be a resident of India, which means he/she should have stayed in India for not less than 182 days in the previous calendar year
Name of the company: Choosing the name of the company is often a technical task. A private limited company is required to cover three aspects while deciding a name for itself:
- Main name
- Activity to be carried out
- Mention of ‘Private Limited Company’ at the end.
Pro tip: It is not always necessary that the name the business owner is looking for will be available, as no two companies can have the same name. Therefore, it is a requirement that at the time of registration, every company has to send 5-6 names for approval to the Registrar of Company (ROC). Moreover, the submitted names should not have a close resemblance with any other company’s name.
Registered office address: After the company has been registered, the permanent address of its registered office must be filed with the registrar of the company. The registered office of the company is where the company’s main affairs are being conducted and where all the documents are placed.
Obtaining other documents: For electronic submission of documents, every company must obtain a digital signature certificate that is used to verify the authenticity of the documents. Moreover, in a company employing professionals (secretary, chartered accountant, cost accountant, etc.) for varied activities, certifications by these professionals is necessary.
Advantages of Private Limited Companies
- Limited liability: In a private limited company, there is a limited liability, which means the members of the company are not at the risk of losing their private assets. If a company fails, the shareholders are liable to sell their assets for payment
- Less number of shareholders: Unlike a public company that requires seven shareholders, a private limited company can be started with just two shareholders
- Ownership: As the company’s shares are owned by investors, founders, and management, the owners are at the liberty of transferring and selling their shares to others
- Uninterrupted existence: As mentioned earlier, the company stays a legal entity until it is legally shut down, the company runs even after the death or departure of any member
Disadvantages of Private Limited Companies
One of the disadvantages it gets with Pvt ltd company is the compliance formalities for shutting it down. It often ends up getting too complicated and time-consuming.
The documents required for a private limited company are:
- ID proof: PAN card and passport of Indian and foreign directors, respectively
- Address proofs: Ration card or Aadhar card or driver’s license or voter ID
- Residence proofs: Bank statement or electricity bill of the premise
- Notarized rental agreement
- NOC from the property owner
- A copy of the sale deed or property deed (for an owned property)