To get the answers to all your questions related to a private limited company, continue reading this article.
When the time comes to start a new business or expand your existing business, many questions pop into your mind. One of the most difficult tasks is to choose the type of corporate identity for your business. After a public limited company, a private limited company is considered a very popular business structure among aspiring entrepreneurs and leading sole business traders in the country. It is among the most relevant corporate legal identities in India. However, before registering for a private limited company, it is extremely important to know the details and Importance of a private limited company. This article covers everything starting from the registration process to the Importance of a private limited company.
What is a Private Limited Company?
A private limited company is governed under the Companies Act, 2013. A private limited company is a company incorporated under the Companies Act, 2013 or any other previous company law. In plain language, a private limited company is a creation of a law that is a privately held business entity by the shareholders, the number of which should not exceed 200.
Features of a Private Limited Company
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Separate legal status
A private limited company has a separate law status other than its members and directors. Even if the shareholders (members) are the contributors to the company’s capital and assets, the company becomes the owner of the same. Even the members can enter into a contract with the company.
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Perpetual succession
Members may come and go or even die, but the existence of the company remains as it is. This is because the company is a creation of law and has acquired a different legal status other than its members. The company continues to do business until the winding up (on specific grounds specified by the act).
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Limited liability
The responsibility of a private limited company’s members is restricted to their contribution to their paid-up share capital. However, the liability of the members may also differ depending on the different types of companies.
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Restricted shares transfer ability
Even though a private limited company allows its members for the overall capital contribution, it restricts the transferability of its shares to the public.
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Common seal
Even if a private limited company is an artificial legal person, it can enter into a contract with other people or corporate bodies. Hence, a common seal here acts as a signature of the company. However, a common seal is optional for a private limited company.
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Artificial legal person
A company is an artificial legal body created by law clothed with the rights of an individual. Hence, a company can own property, bank account, raise loans, incur liabilities, and enter into various kinds of contracts on its own.
Types of Private Limited Companies
A private limited company can be divided into three major parts based on liability. They are as follows:
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Company limited by shares
A company limited by shares is defined under section 2 (22) of the Companies Act, 2013 as a company where the liability of the members is limited to the amount unpaid on the shares held by them. Hence, the shareholders will be liable to the extent that remains unpaid during its shareholders.
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Company limited by guarantee
A company limited by guarantee is defined under section 2 (21) of the Companies Act, 2013 as a company where the liability of its members is limited up to the extent of the amount that is contributed to the assets of the company as mentioned in the memorandum of association in the event of it being wound up.
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Unlimited company
An unlimited company is defined under section 2 (92) of the Companies Act, 2013 as a company where the liability of a member ceases when they cease to be a member. Hence, the liability of the members extends to the whole amount of the company’s debts and liabilities. However, they will be entitled to claim contributions from the other members.
Benefits and Importance of a Private Limited Company
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Increased credibility
The company is a separate legal entity from its members, so the creditors cannot seek direct payment from the members’ business assets even if the company becomes bankrupt.
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Dual relationship
In a private limited company, a specific person can enter into various kinds of contracts simultaneously; that is, they can be a shareholder, member, creditor, employee, etc., of the company simultaneously.
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Easy to maintain
Several online accounting software has made it easy for a private limited company to maintain all its finances and accounting process.
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Flexible management
The pvt limited company is very popular among small business owners who don’t have enough resources to set up a public limited company. Hence, a single business owner with a limited number of shareholders can manage the company successfully.
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Tax efficient
Private limited companies claim corporation tax relief on their profits. Hence, they are considered to be very tax efficient.
Process of Incorporation
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Filling the documents with the registrar
The initial step during the registration process is to fill out all the documents, including the memorandum of association, article of association, declaration by the people involved in the registration process, declaration by subscribers, address of correspondence, particulars of first subscribers, and directors, etc.
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Issue of certificate of incorporation
After one successfully register a company, the registrar will issue a certificate of incorporation as prescribed to the point that the proposed company is incorporated under this act.
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Allotment of CIN
On and from the date mentioned in the company’s certificate of incorporation, the registrar shall allot a Corporate Identity Number (CIN) which will define the company’s distinct identity and will also be included in the certificate of incorporation.
Key takeaways
A private limited company is an individual entity created by law, has the limited liability of its members, restricts the transfer of its shares, and limits the total number of members up to 200. The company can be divided into three basic types: a company limited by shares, a company limited by guarantee, and an unlimited company. The increasing number of start-ups and enterprises has led to a constant increase in the Importance of a private limited company in India.
