A private limited company is a privately-held business entity. It is held by private stakeholders. The liability arrangement in a private limited company is that of a limited partnership, wherein the liability of a shareholder extends only up to the number of shares held by them.
With the startup ecosystem booming across the country and more and more people looking to do something on their own, there is a need to be well-acquainted with different business registration types i.e sole proprietorship, limited liability company and private limited company. In this article, we will talk about different sides of a private limited company.
What is a private limited company?
As the name suggests, a private limited company is a privately-held business entity. It is held by private stakeholders. The liability arrangement in a private limited company is that of a limited partnership, wherein the liability of a shareholder extends only up to the number of shares held by them. The shareholders cannot be held liable beyond the value of the shares. The governing body for such a company is the Ministry of Corporate Affairs (MCA).
Section 2 (68) of the Companies Act, 2013 defines a private company as:
“A Company having a minimum paid-up share capital as may be prescribed, and which by its articles,— (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred; (iii) prohibits any invitation to the public to subscribe for any securities of the company.”
Characteristics of a private limited company
Now that you know what a private limited company is, the next step is to know the characteristics of such a company:
- Membership: Like any other company, a minimum of two shareholders are required in order to start a private limited company. But since it remains a small entity, there is also a maximum cap on the number of members fixed at 200. There is also a requirement of two directors to run the company
- Limited liability structure: In a private limited company, the liability of each member or shareholder is limited. Therefore, even in the case of loss under any circumstances, the shareholders are liable to sell their own assets for repayment. However, the personal and individual assets of the shareholders are not at risk
- Separate legal entity: A private limited company is a separate legal entity and continues in perpetual succession. This means that even if all the members die, or the company becomes insolvent or bankrupt, the company still exists in the eyes of the law. The life of the company will be perpetual, not affected by the lives of its shareholders or members unless dissolved by way of resolution
- Minimum paid-up capital: A private limited company requires to have and maintain a minimum paid-up capital of Rs. 1 lakh. It could go higher, as prescribed by MCA from time to time
Requirements to start a private limited company
Every business type has its own set of requirements before it is incorporated. The requirements for registering a private limited company are as stated below:
Members and directors: As mentioned above, to get itself legally registered, a private limited company must show a minimum number of two and a maximum number of 200 members. This is a statutory requirement as mandated by the Companies Act 2013.
The directors should meet the following conditions:
- Each of the directors should have a DIN i.e. director identification number, which is given by the Ministry of Corporate Affairs
- One of the directors must be a resident of India, which means he/she should have stayed in India for not less than 182 days in the previous calendar year
Name of the company: Choosing the name of the company is often a technical task. A private limited company is required to cover three aspects while deciding a name for itself:
- Main name
- Activity to be carried out
- Mention of ‘Private Limited Company’ at the end.
Pro tip: It is not always necessary that the name the business owner is looking for will be available, as no two companies can have the same name. Therefore, it is a requirement that at the time of registration, every company has to send 5-6 names for approval to the Registrar of company (ROC). Moreover, the submitted names should not have close resemblance with any other company’s name.
Registered office address: After the company has been registered, the permanent address of its registered office must be filed with the registrar of the company. The registered office of the company is where the company’s main affairs are being conducted and where all the documents are placed.
Obtaining other documents: For electronic submission of documents, every company must obtain a digital signature certificate that is used to verify the authenticity of the documents. Moreover, in a company employing professionals (secretary, chartered accountant, cost accountant etc.) for varied activities, certifications by these professionals is necessary.
Advantages of a private limited company
- Limited liability: In a private limited company, there is a limited liability, which means the members of the company are not at the risk of losing their private assets. If a company fails, the shareholders are liable to sell their assets for payment
- Less number of shareholders: Unlike a public company that requires seven shareholders, a private limited company can be started with just two shareholders
- Ownership: As the company’s shares are owned by investors, founders and management, the owners are at the liberty of transferring and selling their shares to others
- Uninterrupted existence: As mentioned earlier, the company stays a legal entity until it is legally shut down, the company runs even after the death or departure of any member
Disadvantages of a private limited company
All though there are many benefits of having a registered private limited company, one of the disadvantages it gets with it is the compliance formalities for shutting it down. It often ends up getting too complicated and time-consuming.
Documents required to register a private limited company
The documents required for a private limited company are:
- ID proof: PAN card and passport of Indian and foreign directors, respectively
- Address proofs: Ration card or Aadhar card or driver’s license or voter ID
- Residence proofs: Bank statement or electricity bill of the premise
- Notarized rental agreement
- NOC from the property owner
- A copy of sale deed or property deed (for an owned property)
How to register a Private Limited Company?
After you finalise a name for the company, follow the below-mentioned steps:
- Step 1: Apply for DSC (Digital Signature Certificate)
- Step 2: Apply for the DIN (Director Identification Number)
- Step 3: Apply for the name availability
- Step 4: File the EMoa and EAOA to register the private limited company
- Step 5: Apply for the PAN and TAN of the company
- Step 6: Certificate of incorporation will be issued by RoC with PAN and TAN
- Step 7: Open a current bank account on the company name
With this, you will be all set to start your own private limited company. Depending on your long-term goal it is advised to consult with the right people and make the best choice for the smooth growth of your business.