Private Limited Company and its Limited Liability- A secure move towards growth

A private entity or private shareholders own a private limited company to achieve more profits. It gets considered as a corporate body that aims to achieve more and profits.

It offers limited liability to its members and legal protection for its members. The private property and assets of the company members are free from the legal hassles in 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 prescribes the definition of a private company as,

A company having a minimum share capital as prescribed by its articles:-

• 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 two hundred members.
• Prohibits any invitation to the public to subscribe to any company securities.

As per section 3 of this act, there is a minimum of two or more persons required to incorporate a private company and,

As per section 149, a company must have a minimum of 2 members as its board of directors.

Salient features of a Private Limited Company

Here are some salient features of a private limited company mentioned below:-

• Requirement of Members– There should be a minimum number of two members and a maximum number of two hundred members in a company as per the provisions of the Companies Act 2013.
• Limited Liability of members– The liability of members or shareholders is limited in such a private company. Suppose the company suffers any loss or any debt is pending, and the company is not in a state to settle all the claims. In that case, its shareholders and members are secure from clearing any liabilities by selling their assets. There are liable up to the extent that the shareholders’ personal individual assets are not at risk.
• Perpetual succession– The company has perpetual existence even if any members die, becomes insolvent or bankrupt. It has a perpetual succession, and it didn’t dissolve even upon the death of its members.
• Index of members– It doesn’t have to maintain the index of its members, whereas a public company ought to maintain an index of its members.
• The Number of directors– It can come into existence and initiate its operations with a minimum of two directors, which can go up to a maximum of fifteen directors. It cannot cross the upper limit of the maximum number of directors unless a special resolution gets passed in this regard.
• Paid-up capital– A private limited company does not have any minimum paid-up capital requirement to form such a company. Such a company can be formed even with 1000 rupees.
• Prospectus– Prospectus is a detailed statement of the company affairs that a company issues for its public.

  It need not issue a prospectus as it does not invite the public to subscribe to its shares.

• Name– All the private companies have to use the word private limited after its name mandatorily.

Types of Private Limited Company

Private Limited companies are categorised into three categories by the liability of their members. These are:-

Limited by Shares

The liability of the members in a company limited by shares gets 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 e made to pay more than his share capital invested in the company as his liability does not extend more than that.

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 of winding-up of the Company.

When the company is making huge profits, the guarantee of the members of a Company Limited by Guarantee cannot get revoked.

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

Unlimited Companies

In unlimited Companies, members of the companies don’t 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.

So, 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 get sued individually. The company will be considered a separate legal entity and can sue and get sued in its name.

Advantages and Disadvantages of Private Limited Companies

Advantages of private limited companies

Here are some advantages of private limited companies listed:-

• 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 public confidence and improve its goodwill like that in the case of a public company.

• Information

A private company don’t have to disclose its financial reports in the public domain, unlike a public company which has to disclose its financial reports quarterly in the public domain.

It gets done to gain public confidence so that more and more subscribe to the shares of that company, and the prices of shares boom, leading to huge profits to the company. In contrast, a private company does not need to do this as people cannot subscribe to its shares on their own in an open market.

• Management and decision making

As a private company shareholder is fewer in number than a public company, the decision-making process is less complex and more efficient.

As more shareholders get consulted, management and decision-making become more complex and confusing in public companies. This complex procedure gets eliminated in a private company as the number of shareholders is less.

• Objective

The main objective of a public company is to increase the value of its shares which will ultimately lead to more capital funding and profit.

While in a private company, the objective of managers is flexible in achieving short term and long term objectives.

• Pressure

Private companies and their members responsible for their operation don’t concern the stock market as their shares are not freely tradable.

Private companies don’t have to make decisions and carry on their operation according to shareholders expectations.

The stock market nowhere influences the policies of private companies.

• Long Term Planning

A private limited company focus on long-term earnings; as such, pressure gets eliminated. They are not pressured to increase their profits in the short term by increasing their stocks’ value.

• Minimum Paid Capital

Earlier, such a company required a minimum share capital of one lakh for its formation. Still, 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 like financial reports, transactions, income tax returns, and other documents confidential. It is not a requisite for them to bring as it will give an unfair advantage to their competitors in the market, which could be harmful to them.

Disadvantages of private limited companies

Besides having advantages, there are also some disadvantages of private limited companies:-

• 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 make them aware 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 get sold by the owner’s will to the private shareholders, which ultimately bars them from capital generation on a large basis to enhance their business and gain profits.

Registration of a private limited company

Once a name for the company is decided, the following steps have to be taken by the applicant:

• Any of the directors should have DSC (Digital Signature Certificate) and apply for it to the MCA portal and DIN (Director Identification Number).
• The company director can apply for the name availability in form INC-1and can choose 6 of the names, out of which ROC will approve for 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 section 4(6) and section 5(6) of the companies act 2013, respectively.
• Form no. INC-7, INC-8, INC-9 needs to get 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 must get attached with the forms.
• The company’s Certificate of incorporation will get issued by the registrar of companies (ROC).

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

Requirements at the time of registration

An individual will need the following at the time of registration of the particular company:-

• Share capital amount and proposed ratio for holding shares.
• The company and nature of the business need to get mentioned to the ROC.
• Ownership and sale deed in case of own property if not then,

  If the property is on rent, 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 non-acceptance 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 Card of the particular company.
• A foreign national subscriber is required to submit nationality proof.

Conclusion

A private limited company is the best way to commence a business for small and medium enterprises. Its characteristics impliedly state that its members are secure from settling any liabilities from their personal assets in case of loss suffered by a company. There is no such minimum capital requirement for its formation, which invites more and more people to commence their business with such type of company.

Such a company does not have to comply with so many legal formalities like a public company and their business. Its objectives mentioned in its memorandums do not depend on shareholders’ will.

The board of directors do the decision-making in such a company in its general or special meeting, which lacks complexity because of having a minimum no. of directors.

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

So, overall a private limited company is the best way to commence a startup business.