What is a Private Limited Company?

A private limited company is a privately held business entity held by private stakeholders. The liability arrangement, in this case, 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 legal terms, 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.”

In this article, we will talk about different sides of a private limited company.

Private companies have the upper hand over public companies with respect to investment in long-term strategies, keeping the values of their shares and financial figures discreet, freedom, and flexibility of operations.

Characteristics of a Pvt Ltd 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 such a 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: This 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

Also read All You Need To Know About Limited Liability Proprietorship 

Requirements to start a Private Limited Company 

Every business type has its own set of requirements before it is incorporated. The requirements for registering this 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: 

  1. Main name
  2. Activity to be carried out
  3. 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 a 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 Private Limited Companies

  • 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 Private Limited Companies

One of the disadvantages it gets with Pvt ltd company is the compliance formalities for shutting it down. It often ends up getting too complicated and time-consuming. 

Documents Required 

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 the sale deed or property deed (for an owned property)

How to register a Private Limited Company

After you finalize a name for the company, follow the below-mentioned steps:

  • #1: Apply for DSC (Digital Signature Certificate)
  • #2: Apply for the DIN (Director Identification Number)
  • #3: Apply for the name availability
  • #4: File the EMoa and EAOA to register the private limited company
  • #5: Apply for the PAN and TAN of the company
  • #6: Certificate of incorporation will be issued by RoC with PAN and TAN
  • #7: Open a current bank account on the company name

With this, you will be all set to start your own private limited company. It is advised to consult with the right people and make the best choice for smooth growth. 

Frequently Asked Questions

What are the disadvantages of a private company?

It restricts the transferability of shares < the stock exchange rate cannot get quoted < there is a limit to the number of shareholders < there is a tedious compliance process

Is a private company better than a public?

Private companies have the upper hand over public companies with respect to investment in long-term strategies, keeping the values of their shares and financial figures discreet, freedom, and flexibility of operations.

How many people can form a private company?

In a Private Company, a minimum of 2 directors and 2 members are required. All these members have limited liability and the maximum number of Members has increased from 50 to 200.

How much does it cost to form a private limited company?

The cost of establishing/registering a Pvt Ltd Company generally varies from INR 6,000 to INR 30,000, depending upon the number of Directors, members, the authorized share capital, and professional fees.

What is compulsory for a private limited company?

Under Section 134, it is mandatory for all private companies to hold an annual general meeting. These companies are required to keep their meetings within six months from closing their Financial year.

What are the rules for a Private Limited Company?

It should have a minimum of 2 Directors and 2 Members < The company members should hold an annual general meeting < The maximum number of Members cannot exceed 200

Author

Khushali is a content marketer at Razorpay. A logophile, traveler and inbound marketing enthusiast, she loves questioning the 'why' and 'how' of almost everything.

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