What you need to know about Private Limited Company?

Last Updated at: Jul 06, 2021
What you need to know about Private Limited Company

Among the many forms of companies present in India, a private limited company is the most common, as the requirements for its registration and other formalities are comparatively less than for other legal entities. A private limited company is regulated by the Companies Act, 2013 and the Companies Incorporation Rules, 2014. In this article, we will touch upon the following topics related to a private limited company: 

  • What is a private limited company?
  • What are the characteristics of a private limited company?
  • What are the requirements for private limited company registration
  • Advantages and disadvantages
  • Documents required for registration
  • Process of registering a private limited company

What is a Private Limited Company? 

A private limited company is a privately held business entity. It is privately held by the shareholders and the maximum shareholders should not be more than 200. 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. Beyond the value of the shares, the shareholders cannot be held liable. Before the registration of a private limited company, its objectives are determined. The governing body for such a company is the Ministry of Corporate Affairs (MCA). 

Section 2 (68) of the Companies Act of 2013 defines a private company as follows: 

“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”

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What are the characteristics of a private limited company?

A private limited company has the following characteristics: 

  1. Membership: In order to start a private limited company, like any other company a minimum of two shareholders is required. However, because it is a small business holding enterprise, 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. 
  2. Limited Liability Structure:  In a private limited company, the liability of each member or shareholders is limited. Therefore, even in the case of loss under any circumstances, its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.
  3. Separate Legal Entity: A private limited company is a separate legal entity and continues in perpetual succession. Meaning 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
  4. 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 the MCA from time to time. 
  5. Minimum Subscription: Subscription here refers to the amount received by the company by way of issuance of shares in a given period of time. Therefore, in a given period of time before the commencement of the business, a company is required to receive 90% of the total worth of all the shares. Failing this, in the absence of the minimum subscription, the commencement of business is not allowed. 

What are the requirements for private limited company registration?

The requirements for registering a private limited company are as stated below: 

  1. Members and Directors- As stated above, a private limited company in order to be registered 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 before registration of the company.

How do we calculate members of a company? 

To calculate the number of members in a private company, the following situations should be considered:

  • If two or more persons are holding shares jointly, they shall be considered as one shareholder for this purpose. 
  • ESOP is an option to issue equity to a person in the employment of the company. Such a person is included in the said calculation. This includes the present and previous employees of the company, who have continued to be members after the employment ceased.

Similarly, for the registration of a private limited company, there is a requirement for a minimum of two directors. The directors should meet the following conditions 

  1. Each of the directors should have DIN i.e. director identification number which is given by the Ministry of Corporate Affairs. 
  2. 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- It is a rather technical task to choose the name of the company. A private limited company is required to cover three aspects while deciding a name for themselves: 

  1. Main Name; 
  2. Activity to be carried out; 
  3. Mention of ‘Private Limited Company’ at the end. 

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 Companies (ROC). Moreover, the submitted names should not have close resemblance with any other companies name. 

  1. Registered office address- Once, the company has been registered, then the permanent address of its registered office should be filed with the ROC. The registered office of the company is where the company’s main affairs are being conducted and where all the documents are placed.
  2. Obtaining a digital signature certificate and professional certification – For electronic submission of documents, every company must obtain a digital signature certificate which is used to verify the authenticity of the documents. Moreover, in a company employing professionals (secretary, chartered accountant, cost accountant,) for varied activities, certification by these professionals is necessary. 

Advantages of Private Limited Company

Limited liability: There is a limited liability, which means the members of the company are not at the risk of losing private assets.  If a company fails, the shareholders are liable to sell their assets for payment. 

Fewer shareholders: A private limited company can be started with just two shareholders, unlike a public company that requires seven. 

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. Through this, there is also less complexity and confusion. 

Uninterrupted existence: As the company is 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 Company 

Although there are many benefits of registering a private limited company, the compliance formalities and winding up may be time-consuming and complicated. Another major disadvantage is that it requires a minimum of two persons to act as directors and shareholders. 

Documents required:

The documents required for a private limited company are:

  • ID proof: PAN card and passports 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)

To know what are all the documents required for company registration click here.

How to register a Private Limited Company?

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

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

To know Company Registration more about  process click here

So why do public companies go private?

Nowadays public companies are converting into private companies because becoming and remaining private allows a more considerable degree of freedom for company management to embark on long-term, innovative, and higher risk ventures without the scrutiny of stock analysts, investors and the media, since the pressures of quarterly results do not bind a private company.

Click here to know the reason behind why do public companies go private.

Exemptions of Private Limited Company:

In India, a lot of start-ups are formed as private limited companies. In the budget 2017-18, several relaxations were announced for start-ups. It is clear that the government has enormous expectations of the startup community and is willing to make changes to accommodate them. The exemptions available for a private company are listed below,

  • Related party transactions
  • Share capital
  • Public deposits
  • Meeting requirements
  • Agreements and resolutions
  • The auditor eligibility
  • Directors
  • Power of the board
  • Senior management appointment

Here is all you need to know about the exemption of private limited company.

Examples of Private Limited Companies:

  • Flipkart
  • Ola
  • Snapdeal
  • Zoomcar
  • Carat Lane

Click here to know more about the examples and advantages of Private Limited Company

Here are some benefits of company incorporation:

Company incorporation

Company incorporation

Click here: pvt ltd company registration