What is a private limited company?
A Private Limited Company is a type of business entity privately owned by shareholders, where the liability of each shareholder is limited to the amount of shares they hold. It operates as a separate legal entity from its owners, offering limited liability protection. Unlike public companies, it does not offer shares to the general public, and the ownership is usually restricted to a select group of shareholders.
Definition of Private limited company
A “Private Limited Company” is defined in Section 2(68) of the Companies Act, 2013. According to this section:
A private company is characterized by the following features:
- Restricted Share Transfer: The company’s articles of association limit the ability to transfer shares, ensuring that shares are not freely transferable.
- Member Limit: Except for One person companies, the maximum number of members is capped at 200. Importantly, when two or more individuals jointly hold shares, they count as a single member for this limit.
- Exclusions from Member Count:
- Employees of the company are not counted towards this limit.
- Former employees who were members while employed and remain members after leaving the company are also excluded from this count.
- Public Subscription Restriction: The company must not invite the public to subscribe to its securities, ensuring that shares are not offered to the general public.
Characteristics of a Private Limited Company
Continual Existence:
The company continues to operate even if its owners change due to death, insolvency, or leaving the company. It stays active until it is officially closed down.
No Minimum Capital Requirement:
There is no mandatory minimum capital required to start a private limited company, making it more accessible for small businesses and startups.
Capacity to Raise Capital:
A private limited company can raise funds through equity, bank loans, and private placements without going public, giving it more flexibility in financing growth.
Confidentiality of Financial Information:
Private limited companies are not required to publicly disclose as much financial information as public companies, allowing them to maintain more privacy in their operations and financial performance.
Minimum and Maximum Shareholders
Requires a minimum of two shareholders and can have up to 200 shareholders.
Restrictions on Share Transfers:
Shares cannot be freely traded or transferred. Transfers are typically subject to approval by the board of directors or existing shareholders.
Types of Private Limited Company
Under the Companies Act, 2013, promoters have the flexibility to incorporate various types of companies with different levels of liability. This includes choosing between structures like Limited Liability Partnerships (LLP), Private Limited Companies, and One Person Companies. following three forms of Private Limited Company depending on the company requirements.
- Private Limited Company by Shares
This is the most common type of private limited company. It’s owned by shareholders who invest in the company and receive shares in return. These companies can have a limited number of shareholders, and shares cannot be traded on public stock exchanges. They are often used by small to medium-sized businesses. - Private Limited Company by Guarantee
This type doesn’t have shareholders but instead has members who act as guarantors. The members agree to pay a certain amount if the company faces liquidation. This structure is commonly used for non-profit organizations, clubs, and associations. - Private Limited Company Limited by Shares and Guarantee
This is a hybrid type combining features of both the above types. It has shareholders (like a company by shares) and members who act as guarantors (like a company by guarantee). This setup is less common but can be used for specific purposes.Requirements to start a Private Limited Company
The following requirements must be fulfilled to start a private limited company in India:
- A minimum of two shareholders are required to start a private limited company. The maximum number of shareholders allowed is 200.
- A minimum of two directors are required to start a private limited company. At least one of the directors must be a resident of India.
- The Registrar must approve the proposed name of the company of Companies (ROC). The name must be unique and not similar to any other company name registered with the ROC.
The directors must obtain the following:
- Digital Signature Certificate
- Director Identification Number
- Permanent Account Number (PAN)
- Tax Deduction and Collection Account Number (TAN)
- GST Registration
- Private limited companies must comply with various legal and regulatory requirements, such as maintaining proper books of accounts, holding annual general meetings, and filing annual returns with the ROC.
Conclusion:-
A Private Limited Company (Pvt Ltd) is an increasingly popular choice for businesses in India due to its robust advantages. With features like liability protection, operational flexibility, and confidentiality, it provides a solid foundation for long-term growth. The structure facilitates ease in attracting investment and ensures business continuity, making it an ideal option for SMEs and entrepreneurs. By understanding what is a private limited company, including its key characteristics and registration requirements, you can make informed decisions to build a successful and sustainable business.
Starting a private limited company in India requires meeting several key requirements and adhering to various legal and regulatory obligations. MSME Story can assist you with the entire Company Registration process in India, ensuring that you comply with all necessary regulations and streamline your business setup.
