Table of Contents

Private Limited Company: Explained

Private-Limited-Company

WHAT IS A PRIVATE LIMITED COMPANY?

A Private Limited Company is one of the most popular way of conducting business in India and is governed under the Companies Act, 2013 and the Companies Incorporation Rules, 2014.

Private Limited Companies are mostly privately held for small scale businesses. The liability of the members of a Private Limited Company is limited to the extent of shares held by them respectively. Shares of Private Limited Company cannot be traded in public like that of Public Limited Company.

The Start Up India Program, the Make In India Program and the Digital India program initiated by the Indian government are boosting more and more new Private Limited Companies in the market. Let us discuss the main Characteristics of a Private Limited Company.

CHARACTERISTICS OF PRIVATE LIMITED COMPANY?

CHARACTERISTICS OF PRIVATE LIMITED COMPANY

1. Number of Members: As per the provisions of Companies Act, 2013, the minimum number of members in a private limited company is 2 and the maximum number of members can be 200. So, any number of members ranging between 2 to 200 are required to register a Private Limited Company.

2. Number of Directors: As per Companies Act, 2013, there can be a minimum number of 2 Directors and maximum of 15 Directors in a Private Limited Company. They are not required to appoint any Independent Directors.

3. Capital: The minimum Paid-up Capital in a Private Limited Company should be at least 1 lakh or such higher amount which may be prescribed by the Government from time to time. Currently minimum paid up capital is Rs.1 lakhs.

4. Subscription: The most important Characteristic of the Private Limited Companies is that the government has exempted them from minimum subscription rule. The minimum subscription refers to the amount which is received by the company. This minimum amount is equal to 90% of the shares of the company and the private limited companies are given the exemption from fulfilling this criteria.

5. Name: All the private limited companies are required to add the term ‘private limited’ after its name. This characteristic makes it easier for the customers and the officials to identify the private limited companies from the pool of all the other companies.

6. Prospectus Prospectus is a detailed statement of the company affairs which is issued by a Public Limited Company for its public. However, in the case of Private Limited Company, prospectus is not required to be issued because in this, shares are not issued to the public for subscription.

7. Limited Liability The liability of each member or shareholders is limited. It means that if a company faces loss under any circumstances then its shareholders are not liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.

8. Perpetual succession There’s a famous Quote “Directors may come and Directors may Go, but the Company goes on forever”. The Company keeps on existing in the eyes of law even in the case of death, insolvency, bankruptcy of any of its members. This leads to perpetual succession of the company.

9. Non- Transferability of Shares: There is a restriction on transferability of shares by the shareholders as per Companies Act, 2013. This provision is enacted to prevent takeover of small Private Limited Companies by the Big Business houses and Public Limited Companies.

10. Cannot Accept Deposits from Public:  The Act also restricts Private Companies to accept deposits from public in any form. Private Companies can borrow money only from Financial Institutions such as Banks, etc in order to scale their business.

REQUIREMENTS FOR PRIVATE LIMITED COMPANY REGISTRATION:

REQUIREMENTS OF PRIVATE LIMITED COMPANY

The basic requirements for private limited company registration are:

1. Members- A minimum number of 2 and a maximum number of 200 members or shareholders are required as per the Companies’ Act 2013 at the time of registration of the company.

2. Directors- A minimum 2 directors are required for incorporating Private Limited Company. Each director should have Director Identification Number (DIN) which is issued by the Ministry of Corporate Affairs. Any one of the directors of the Private Limited Company must be a resident of India in a previous calendar year.

3. Name- The name of the company contains three parts i.e. ‘the name’, ‘the activity’ and the term ‘private limited’. It is necessary for all private company to use the word “Private Limited” at the end of its company name. Every company has to send 2 Proposed Company Names to the registrar of the company for approval and all the names should be unique and expressive. The name should not resemble with any other company’s name.

4. Registered office address- While incorporating Private Limited Company, the directors should provide an Address as Registered Office of the Company. However, when the company has been registered then its permanent address of its registered office should be suited with the registrar of the company. The Registered office of the company is where companies main affairs are been conducted and where all the documents are placed.

5. Obtaining digital signature certificate- In today’s modern world everything is done online. All documents are submitted electronically and for that, every company must obtain a digital signature certificate which is used to verify the authenticity of the documents. A digital signature is obtained by all the directors which are marked on all the documents by every director.

6. Professional certification- In a company there are many professionals which have required for many purposes. For incorporating a private limited company certification by these professionals are necessary. Various professionals such as company secretary, chartered accountant, cost accountant etc are required to make their certification at the time of company incorporation.

ADVANTAGES OF PRIVATE LIMITED COMPANY:

ADVANTAGES OF PRIVATE LIMITED COMPANY

1. Ownership- In a public company, regulation and ownership of shares can be sold to the public on an open market. On the other hand, in a private company, shares can be sold or transferred to other people by the choice of the owner. Shares of such company are owned by founders, management or a group of private investors. Shares here are not sold in open market. Thus there will be less number of shareholders. This means less complexity and confusion in decision making and management.

2. Minimum Number of Shareholders- For a private company, a minimum number of required shareholders is 2, whereas, for a public company, you require a minimum of 7 shareholders.

3. Legal Formalities- Legal formalities are sometimes very expensive and time-consuming, aren’t they? If you’re planning to start a public company, you better be prepared because there is a long list of legal formalities for forming a public company. Private companies have comparatively shorter list.

4. Disclosing Information- A public company is required to disclose their financial reports to public every quarter, as it will affect public investment; private companies are not subjected to any such compulsion.

5. Management and Decision Making- Management and decision making becomes more complex and confusing in public companies as more number of shareholders are to be consulted. This complex procedure is eliminated in private company as the number of shareholders is less.

6. Focus Of Management- Managers of Public Company are focused on increasing the value of shares, whereas managers of the private company are more flexible in the short term and long term business decisions.

7. Stock Market Pressure- Private companies are not pressurized by the stock market and you don’t have to worry about shareholder expectations and interference as long as they work within the law. Shareholders in public companies are focused on current earnings and they exert pressure on the company to increase earnings.

8. Long Term Planning- Managers of public companies are pressurized to increase earnings in the short term in order to increase the value of their stock. Private companies can focus on long-term earnings as such pressure is eliminated.

9. Minimum Share Capital- You will be needing a lot of money for a public company. A public company requires minimum share capital of Rs. 5,00,000. For a private company, the earlier minimum number of share capital was Rs. 1,00,000, but now there is no such minimum compulsion. Therefore there is no pressure of fund requirements.

10. Confidential- It is obviously not appropriate, for competitors to know about your business secrets. Confidential information such as executive compensation, legal settlements, and other essential information cannot be kept reserved in public companies. Such information is more secure in a private company.

11. Easy to Change Owners: In Private Limited Companies, it is easy to add or remove Directors and Shareholders.

12. Tax Advantages: Private Limited Companies enjoy more tax benefits and subsidies as compared to LLPs, Partnership Firms. Current Flat Tax rate applicable to Private Companies is @22% on Net Total Income of the Company. Whereas 30% Tax Rate is applicable on Partnership Firms and LLP’s.

13. Market Creditability: Banks, Other Financial Institutions, Debtors and Creditors rely more on Private Limited Companies in comparison to Sole Proprietorship, LLPs and other Business structures. Market Trusability and Capacity of Private Companies is quite High.

14. Growth & Stability: Since Bank, etc prefer to grant loans and advances to Private Limited Companies, thus, it automatically ensures Growth & Stability of the Business. Startup Businesses therefore prefers Pvt. Ltd.

15. Increased Borrowing Capacity: Companies enjoys better avenues for borrowing of funds as It can issue debentures, secured as well as unsecured and can also accept deposits from the public, etc.

16. Attracts more Customers and Suppliers: Stable and fast growing businesses often attracts new Customers. Thus, Private Limited comes into this picture. Customers rely more on Private Companies than Proprietorship business.

17. Perpetual Existence: A company has Perpetual Succession, i.e. uninterrupted existence until it is legally dissolved. There is no effect on the company  by the death or departure of any member and it continues to be in existence.

18. Brand Building: Branding is very important aspect for company as it acts as a visual voice and it is easy for Private Limited Companies to emerge as a brand. Customers, Banks and other stakeholders easily trust on Brands.

19. Minimum Investment: Private Limited Companies can be incorporated with a minimum authorized and paid-up capital of Rs 1 lakh.

20. Separate Legal Entity: Company, Directors and its Shareholders are treated as Separate Legal Person, thus, shields from personal liability and protects from other risks and losses. This means in case of losses and windup of company, Shareholders are not required to pay from their personal assets.

PROCEDURE TO REGISTER A PRIVATE COMPANY

PROCEDURE OF PRIAVTE LIMITED COMPANY REGISTRATION

1. Preparation of Digital Signature Certificate- First Step is to prepare Class-2 Digital Signature Certificates of All the Directors and Shareholders who are going to be the part of Proposed Company. Mobile Number verification, email verification and video verification is necessary to get a DSC. This device is required to sign all the documents electronically while incorporating a Company.

2. Director Identification Number (DIN)- Second Step is to apply for Director Identification Number i.e. DIN in Form-DIR-3. It is Unique Number allotted by the MCA (Ministry of Corporate Affairs) to each Director of the Company.

3. Name Approval- Third is to choose and apply for Unique Name for your Company to the Registrar of Company through RUN(Reserve Unique Name) functionality on MCA Portal. Name must be unique and doesn’t resemble to any other existing company. Name Approval Fees is Rs.1000/- to be paid online to MCA Portal. You can check your name here.

4. Preparation of Forms and Documents- Various Documents such as SPICE MOA, SPICE AOA, SPICE in which Affidavit, DIR-2, INC-9, INC-8, Address NOC, KYC of all Directors and shareholders, Electricity Bill for Registered Office is to be attached. All there documents is to be digitally signed by all the directors, shareholders and Chartered Accountant before uploading on MCA Portal.

5. Uploading Documents to Registrar of Companies – Fifth Step is to upload Spice (along with attachments), Spice MOA, Spice AOA on MCA Portal and wait for the Approval. It takes 2-3 days for Approval or Resubmission.

6. Allotment of COI, PAN & TAN-  After obtaining Approval from MCA, they will issue Certificate of Incorporation (COI), PAN & TAN to the Company.

DOCUMENTS REQUIRED TO REGISTER A PRIVATE COMPANY

1. PAN Card or Passport (Foreign Nationals & NRIs)

2. Copy of Aadhaar Card

3. Passport-sized Photograh

4. Voter’s ID/Passport/Driver’s License

5. Latest bank statement (2 months)/ telephone or mobile bill/ electricity or gas bill

6. Notarized Rent Agreement in English

7. No-objection certificate (NOC) from the property owner

8. Sale Deed/Property Deed in English in case of owned property

REGISTER YOUR OWN PRIVATE LIMITED COMPANY

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