A private company is a firm owned by a private owner. A private company has private ownership and whose shares are not allowed to get traded on a public exchange.
A private company can issue its stock but not get traded through an Initial Public Offering (IPO). A private company is an entity that is not answerable to its shareholders; it requires a certificate of incorporation to commence its business.
The liability of the private company members is limited to the number of shares held by them respectively; that is why it is called a private limited company.
A private company must have a minimum of two and can extend up to two hundred members for its formation and existence. It cannot generate funding through public capital markets and can only rely upon funding from private entities.
A private company can issue its securities through the rights issue and bonus issue or private placement.
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Definition of a private company
The term ‘private company’ gets defined under section 2(68) of the companies act, 2013. It states that a private company has a minimum share up capital.
A private company restricts the rights to transfer its shares by its articles of association. It also limits its no. of members to two hundred except in the case of a one-person company.
It is different from a public company which allows its shares to get traded publicly. It prohibits any invitation from the public to subscribe to securities of the company.
If two or more people hold shares of a company on a joint basis, then those persons will be treated as a single person.
Types of private companies
Private companies are classified in some forms depending on the limit on the liability of their members. These are:-
Limited by Shares:
A private limited company in which its members’ liability gets limited by the number of the shares held by each member and up to the value of unpaid shares comes under this category. This liability explicitly gets mentioned in the memorandum of association of the company.
The liability of the members cannot be more than the amount of share capital invested in the company by him.
Limited by guarantee:
A private limited company in which each member’s liability extends to the liability amount undertaken by each member mentioned in the memorandum of association.
In simple words, the liability of ist members extends to the guarantee undertaken by the members of the company. This liability cannot exceed more than the specified guarantee by the members.
The private companies do not have any liabilities on their members with no specified or fixed liability. And the liability extends to the whole amount of debt and liabilities of the company.
Obtaining the certificate of Incorporation
It’s essential to follow some steps to obtain the certificate of incorporation. These are:-
- The first and foremost step towards this process is acquiring the directors’ digital signature certificate (DSC) and subscribers to file MOA and AOA. Further, DSC is also required to obtain the DIN of the directors.
- DIN is the director identification number required to be obtained by an individual to be a company director.
- The next step is to make an application to reserve the company’s name by filing form INC-1.
The applicant can apply for a maximum of six names in the form, considering that these names must not be identical to an existing company or LLP or registered trademark.
Once the name is approved, it gets reserved for the applicant for 60 days. In it, the applicant has to apply for obtaining the certificate of incorporation.
- The last step is to apply for obtaining the certificate of incorporation in the SPICe form with SPICe_MOA and SPICe_AOA.
- After submitting the application, the form for PAN and TAN gets generated online, which must get submitted after affixing DSC to the Ministry of corporate affairs.
- After verifying all the documents, the registrar of companies may grant the company’s certificate of incorporation.
Benefits of obtaining a certificate of incorporation
- Limited liability of members/shareholders:- The liability of members or shareholders of a private company is limited. In case of distress, the private properties or assets of the shareholders/members cannot get attached for repaying debts.
- Separate legal entity:- A Pvt ltd company has a separate legal existence. It means the assets and liabilities of the company members are different from the assets and liabilities of the company. In case of loss, the creditors cannot proceed against the members for recovery of debt.
- Capital Funding:- A Pvt ltd company can easily raise capital from banks and financial institutions, venture capital firms, equity firms, etc.
- Public’s Confidence:- The companies registered under the companies act, 2013 can easily gain the people’s confidence. The details of that company can get checked easily on MCA’s portal.
- Perpetual succession:- A registered Pvt ltd company has a perpetual existence after the company’s incorporation till the time it is dissolved. A certificate of incorporation is also valid till perpetuity if the company exists and it expires only on winding up.
Privileges of a private company
As private companies do not allow its shares to be traded in the capital market to raise funds, it is subject to fewer restrictions than public companies. These exemptions from restrictions refer to the privileges of a private company. These are:-
- A private company requires a minimum of two persons only for its formation.
- A private company is not required to issue a prospectus and is further not required to file a statement in lieu of a prospectus before allotting shares.
- A private company is not required to file for a certificate for commencement of business after the company’s incorporation; it can directly initiate its business conduct immediately after receiving the certificate of incorporation.
- The restrictions applicable to public companies regarding voting rights, disproportionate voting rights, termination of disproportionate excessive rights do not apply to private companies.
- It is not a requisite for a private company to appoint an independent or women director.
- The provision for the retirement of directors by rotation does not apply to private companies.
- It is not a requisite for a private company to constitute an audit committee, remuneration committee or nomination committee.
- Private companies do not require to appoint a secretarial auditor.
- A private company is not required to hold a statutory meeting and file a statutory report with the registrar.
- The ceiling on managerial remuneration does not apply to private companies.
- Any person other than a member of companies is not entitled to inspect the company’s balance sheet and profit and loss account.
- A single resolution can appoint all the directors of a private company.
- A private company can provide financial assistance for the subscription or holding of its shares.
- After achieving the required paid-up capital, a private company further can convert to a public company by issuing an IPO.
Limitations of private company
Besides having benefits, a private company is also subject to some restrictions. These are:-
- The securities of a private company cannot get transferred freely.
- Private companies cannot generate funds publicly as their shares are not tradable in the capital market on a public exchange.
- Private companies do not enjoy public confidence as their affairs are secret between their members and even their balance sheet is not accessible by any person other than its members.
- Private companies cannot issue their prospectus publicly.
- In a private limited company maximum no. of members cannot exceed 200 in any case.
Difference between a private company and a public company
There are some key differences between a private and a public company. These are:-
- The minimum number of members in a private company must be two in number for its formation. In contrast, a minimum number of members in a public company must be seven for its formation and existence.
- The maximum number of members in a private company cannot exceed two hundred in number, while there is no limit on the maximum number of members in a public company.
- There must be three directors to start a public company, while in a private company, the minimum number of directors must be 2.
- It is not a mandate to hold a statutory meeting in a private company, while in a public company case, it is mandatory to hold statutory meetings.
- The shares of a public company can be traded freely on a stock exchange. In contrast, shares of a private company are not allowed to get traded freely as the shares are held privately by the members or shareholders of the company.
- In an annual general meeting, the minimum requirement for no. of persons to be present is 5 for forming the required quorum in a public company. In a private company, the minimum number of members must be 2 in an annual general meeting.
- The public at large gets invited to subscribe to the shares of a public company, while the public at large cannot subscribe to the shares of a private company.
- A public company should issue the prospectus while it is not a mandate in the case of a private company.
- A public company has to get a certificate of incorporation with a certificate of commencement to commence its business. In contrast, a private company only requires a certificate of incorporation to commence its business.
- A public company can raise funds by introducing IPO’s in the capital market, while a private company can only raise funds through private investors, banks, or other private entities.
The private companies have limited liability of their members, so they get described as private limited companies. The private limited companies are smaller in size and market value than the public companies, but it is the most preferred way of company formation for startups in India.
As the shares of a private company do not get traded publicly so, it is not answerable to the public at large. The private companies enjoy the advantage that they don’t have to disclose their annual report to the public.
The private companies also maintain their secrecy by not revealing their financial needs to the public. No one except the company members is allowed to inspect its balance sheet.
The incorporation of a private company shows a way towards initiation confidence in the people as the certificate of incorporation of the company carries all the company’s details with the name of directors, etc., which can also get checked on the Ministry of corporate affairs (MCA) portal.
A private company paves the way for budding talent and entrepreneurs to enter the market and boost employment, economy, and talent.
What is the difference between MOA and AOA?
MOA is the memorandum of association of a company that describes the company's constitution, powers, and object.
AOA is the Articles of association of a company that mentions all the rules and regulations concerning the company's management.
What is the validity period of the certificate of incorporation?
The certificate of incorporation issued by the registrar of companies is valid until the time the company is in existence and expires after the company winds up.
Which section of the companies act 2013 provides for the incorporation of a company?
Can a private company be incorporated with a residential address?
A private company can be registered on a residential address as any address can be provided to incorporate a company to MCA.
What is DIN?
DIN is a director identification number issued by the ministry of corporate affairs to the director of a company.
What is the difference between a private limited company and a sole proprietorship firm?
In a Pvt ltd company, the liability of its members are limited to the extent of capital invested by them while,
In a sole proprietorship firm, the liability of its member is unlimited as it gets handled by a single member only.
Is it mandatory to register a sole proprietorship firm?
No, the proprietorship registration is not a mandate in India.