Private Limited Company and its Limited Liability – A Secure Move Towards Growth

A private entity or private shareholders owns or own a private limited company with the objective of generating profits.

A private limited company offers limited liability to its members and legal protection for its members. The private property and assets of the company members are free from legal hassles in the case of debts and liabilities in the company’s name. The liability of shareholders in this company extends up to the number of shares.

The Companies Act

Section 2(68) of the Companies Act 2013 defines a private company as

A company having a minimum share capital as prescribed as follows:

• Restricts the right to transfer its shares, which is an exception in the case of a one-person company.
• Having a limit of a maximum of 200 members.
• Prohibits any invitation to the public to subscribe to any company securities.

As per Section 3 of this act, a minimum of two or more persons should incorporate a private company, and as per Section 149, a company should have a minimum of two members as its board of directors.

Salient features of a private limited company

The salient features of a private limited company are as follows:

• Requirement of members: As per the provisions of the Companies Act 2013, a minimum number of two members and a maximum number of 200 members are permissible in a company.
• Limited liability of members: The liability of members or shareholders is limited in such a private company. In case of the company experiencing any loss or having debt, and the company is not in a state to settle all claims, its shareholders and members are secured from clearing any liabilities by selling their assets. The personal individual assets of the shareholder are not at risk.
• Perpetual succession: The company has perpetual existence even if any members dies, becomes insolvent, or bankrupt. A private limited company has perpetual succession, and it does not dissolve even upon the death of its members.
• Index of members: The company need not maintain the index of its members, whereas a public company is mandated to maintain an index of its members.
• Number of directors: A company can be formed and start its operations with a minimum of two directors, which can go up to a maximum of 15 directors. The company cannot cross the upper limit of the maximum number of directors unless a special resolution is passed in this regard.
• Paid-up capital: A private limited company does not have any minimum paid-up capital requirement to form this type of a company. Such a company can be formed even with Rs. 1000.
• Prospectus: The prospectus is a detailed statement of the company affairs that a company issues for its public. A company is not mandated to issue a prospectus as it does not invite the public to subscribe to its shares.
• Name: All private companies are mandated to use the word private limited after its name.

Types of Private Limited Company

Private limited companies are classified into the following three categories by the liability of their members:

Limited by shares

The liability of the members in a company limited by shares is limited by the memorandum of association to the amount of his share, which remains unpaid.

Therefore, the shareholder’s liability in a private company is limited by shares restricted to the paid-up share capital or any unpaid amount.

The shareholder cannot be made to pay more than his share capital invested in the company as his liability does not extend beyond his investment.

Limited by guarantee

In a private company limited by guarantee, the liability of its members is limited to the amount of liability guaranteed by each of the members in the memorandum of association.

Therefore, the members of a private company limited by guarantee cannot be held liable for an amount higher than the amount of guarantee undertaken in the memorandum of association of the company.

The members of such a company can be called to settle their guarantees in the case the company winds up.

When the company is making considerable profits, the guarantee of the members of a company limited cannot be revoked.

A company limited by guarantee is suitable for all companies that require minimal capital funds for its existing operation.

Unlimited Companies

In unlimited companies, members of the companies do not have any restrictions on the liability of their members.

The liability of each of the members is unlimited and extends to the whole amount of the company’s debts and liabilities.

The creditors of an unlimited company can attach the personal property and assets of the company members to settle the debts and liabilities of the company at the time of its winding up.

Even after unlimited liability, the company members cannot be sued individually. The company is considered a separate legal entity and can sue and be sued.

Advantages and Disadvantages of Private Limited Companies

Advantages of private limited companies

Here are some advantages of private limited companies:

• Ownership: Unlike a public company, in a private limited company, shares cannot be sold or transferred to other people in the open market. It can get transferred to private shareholders only with the will or wish of the owner.

  Shares of such companies get owned by founders, management, or a group of private investors. As private companies do not allow their shares to get traded in an open market, i.e. share market, there will be fewer shareholders, and decision-making will be less complex, efficient, and prompt.

• Minimum number of shareholders: Another advantage of a private company is that it requires fewer members to incorporate more than a public company. It requires a minimum number of two shareholders, whereas a public company requires a minimum of seven shareholders.
• Legal formalities: Private companies have to comply with fewer legal formalities than public companies.
  Private companies require fewer filings than public companies as most of their work need not be in the public domain to gain goodwill.
• Information: Unlike a public company which is mandated to disclose its financial reports quarterly in the public domain, a private company does not have to disclose its financial reports in the public domain.
  Public disclosure is performed to gain public confidence so that more people subscribe to the shares of that company, and the prices of shares boom, consequently, leading to profits to the company. By contrast, a private company does not need to disclose as people cannot subscribe to its shares on their own in an open market.
• Management and decision making: Because the number of private company shareholders is fewer than that of a public company, the decision-making process is less complex and more efficient.
  In public companies, when more shareholders are consulted, management and decision-making become more complex and confusing. This complex procedure is eliminated in a private company as the number of shareholders is less.
• Objective: The objective of a public company is to increase the value of its shares, which will lead to more capital funding and profit.
  In a private company, the objective of managers is flexible and categorised into achieving short-term and long-term objectives.
• Pressure: Private companies and their members are not concerned with the stock market as their shares are not freely tradable.
  Private companies do not have to make decisions and conduct their operation according to the expectations of the shareholders.
  The stock market does influence the policies of private companies.
• Long-term planning: A private limited company focuses on long-term earnings; as such, pressure is eliminated. The members are not pressured to increase their profits in the short term by increasing the value of their stock.
• Minimum Paid Capital: Earlier, such a company required a minimum share capital of one lakh for its formation. After the Companies (amendment) Act 2015, there is no such minimum requirement of share capital to be maintained to form a company.
• Confidentiality: Private companies keep their information, such as financial reports, transactions, income tax returns, and other documents confidential. This is performed to avoid unfair advantage to their competitors in the market.

Disadvantages of private limited companies

Private limited companies have the following disadvantages:

• It does not allow the transfer of shares by its articles.
• It restricts the number of members up to 200, and the number of members cannot exceed it.
• It cannot issue prospectus to the public to spread awareness of the conduct of affairs of the company to gain the trust and creditworthiness of the public and investors.
• It cannot sell its shares in the stock market, and it can only be sold by the owner’s will to the private shareholders, which bars them from unscrupulous capital generation to enhance their business and gain profits.

Registration of a private limited company

First, the name of the company is decided. The following steps are then to be taken by the applicant:

• Any of the directors should apply for a digital signature certificate (DSC) to the MCA portal and director identification number (DIN).
• The company director can apply for the name availability in form INC-1 and can choose six of the names, out of which the registrar of companies (ROC) will approve only one name.
• If the ROC rejects all the names, the company director will have two more chances to apply for the names by filing the required fees. This name should not be similar to the name of any existing company, trademark, or any such name.
• The memorandum of association and articles of association of the company should get drafted as per the requirements under Sections 4(6) and 5(6) of the Companies Act 2013, respectively.
• Form no. INC-7, INC-8, and INC-9 should be filed with ROC.
• The e-MOA and e-AOA with the aforementioned forms must be filed with the ROC on the MCA portal to register the company.
• Apply for the company’s PAN and TAN, which be be attached with the forms.
• The company’s Certificate of Incorporation is issued by the ROC.

NOTE:- If a person does not want to go into the detailed process, he can file an INC-29 form as an integrated form for incorporation of such a company instead of filing different forms.

Requirements at the time of registration

The following are the requirements for the registration of a company:

• Share capital amount and proposed ratio for holding shares.
• The company and nature of the business should be mentioned to the ROC.
• Ownership and sale deed in case of own property. If the property is rented, you need to submit a copy of the rent agreement with a No Objection Certificate (NOC) from the landlord.
• Identity proof and address proof of the directors and shareholders
• Address proof of the registered office
• A duplicate copy of the address proof for directors
• Occupation details of directors and shareholders.
• Contact details of directors and shareholders.
• Passport size photo of directors and shareholders
• Affidavits for nonacceptance of deposit from the public under the Companies Act 2013.
• NOC for a change in the original subscribers of the memorandum of association.
• MoA and the AoA subscriber sheets containing details of the subscriber and the number of shares he is subscribing for.
• PAN of the company.
• A foreign national subscriber is required to submit nationality proof.

Conclusion

A private limited company is the best method to commence a business for small and medium enterprises. The members are secure from any liabilities and from their personal assets are safe in the case of loss suffered by a company. The formation of such a company does not require a minimum capital requirement, which invites more people to commence their business with such a company.

A private limited company does not have to comply with many legal formalities that a public company has to. The objectives mentioned in the memorandums of the company do not depend on the will of shareholders.

The board of directors are responsible for decision-making, which simplifies the process because of the limited number of directors.

This company’s financial transactions and reports remain confidential, which prevents them from competing against unfair trade practices.