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Private Limited

Companies Act 2013 – Private Companies

A private limited company, under the Companies Act, 2013 is often favored as it houses a number of advantages that benefits the entrepreneurs, like perpetual succession and limited liability. The ease of availing of funds and having no minimum paid-up capital has made private limited companies the most suitable for businesses. In this article we shall see about companies act 2013- private companies.

The business sector in India has been showing remarkable progress in recent years. With several government-aided programs such as ‘Make in India’, the ease of doing business has improved too. The entrepreneurs who launch their businesses most often think big and do everything possible to make their businesses a grand hit. Such go-getters often choose a corporate structure that is as huge as their business goals. Whilst, the Companies Act, 2013 encompasses a variety of corporate entities, the one which is most suited for a fast-growing business is a Private Limited Company.

Private Company

A private company, also known as a privately held company or privately owned business, refers to a business entity owned either by non-governmental individuals, a group of individuals, or non-governmental entities. The ownership of a private company isn’t publicly traded on a stock exchange. Shares of the company are held, bought, or sold privately among a limited number of shareholders.

Private companies often operate without the same level of regulatory requirements as public companies, allowing them more flexibility in decision-making processes and confidentiality in their financial operations. They are not obligated to disclose financial information to the public, except to the extent required by law.

These companies are generally smaller in scale compared to public corporations and are often family-owned, partnerships, or closely held businesses. The ownership structure and governance of private companies can vary significantly, allowing for more personalized control over operations, strategy, and management.

The Companies Act 2013 is a significant legislation in India governing the incorporation, functioning, and regulation of companies. It replaced the Companies Act of 1956 and was enacted to modernize corporate laws in the country, aiming for greater transparency, corporate governance, and investor protection.

Key Features of the Companies Act 2013 include:

  1. Incorporation and types of companies: It defines various types of companies such as private companies, public companies, one-person companies, and provides guidelines for their formation.
  2. Corporate governance: The Act emphasizes the roles and responsibilities of directors, auditors, and shareholders to enhance corporate governance practices.
  3. Investor protection: It aims to safeguard the interests of shareholders and stakeholders by requiring enhanced disclosures, financial reporting, and accountability.
  4. CSR (Corporate Social Responsibility): It mandates certain companies to spend a portion of their profits on socially beneficial activities.
  5. Insolvency and winding up: It provides a comprehensive framework for insolvency resolution and the winding-up process of companies.

The Companies Act 2013 has been subject to various amendments aimed at aligning corporate practices with evolving business dynamics and global standards.

Elucidation of Private Company Under the Companies Act 2013:

By definition, a private limited company’s Articles of Association (AoA) curtails the transferability of shares and holds the public back from subscribing to them. This is exactly why stock exchanges don’t include private companies. This is the most basic difference between a public and a private company.

A private company can have a maximum of 200 members. The company should have a minimum of two members except for One Person Company (OPC). Formerly, a private limited company was mandated to have a minimum paid-up share capital of ₹100,000. But after the amendment in the year 2015, the provision was repealed. This has now become an added advantage, as a private limited company can start up even with a very minimal paid-up share capital.

Characteristics of a Private Company:

  • Minimum Capital: There is no minimum paid-up share capital for incorporating a private company.
  • Members: A private company should have a minimum of 2 to a maximum of 200 members, wherein one-person companies are an exception.
  • Transferring of shares: A private company is not allowed to transfer shares to the public.
  • Name of the Company: The name of a private company must be unique and must be approved by the Ministry of Corporate Affairs (MCA). The name should end with the words “Private Limited”. For instance, ‘XYZ Private Limited’.

Types of Companies:

There are three predominant types of private companies, classified as per the liability of the members:

  1. Limited by Shares: Here the liability of the members is with respect to the nominal value of the shares, wherein the shareholders do not have to pay for the losses in excess of the value of the shares held by them
  2. Limited by Guarantee: Here the members act as guarantors, wherein they pay a nominal amount if the company ends up being wound up.
  3. Unlimited Liability: As the name suggests, the members have to bear unlimited liability in this type of company. The personal assets of the members may be attached if the company is wound up.

Registration of a Private Limited Company:

The following steps have to be adhered to while registering a private limited company.

Step 1: Digital Signature Certificate (DSC)

As the registration process has gone online, a DSC is mandatory for the directors of the company to authorise the documents and forms that are to be uploaded to the MCA (Ministry of Corporate Affairs) portal.

Step 2: Director Identification Number (DIN)

The Directors of the company must mandatorily possess the DIN. It’s a unique 8-digit number used to maintain the details of the director in the database. The DIN can be obtained by filing form DIR 3 or the form SPICe+ (Simplified Proforma of Incorporating a Company Electronically).  

Step 3: Name of the Company

The name of the company must be unique and has to be reserved by filing the form SPICe+. The RUN (Reserve Unique Name) web service reserves the name thus chosen for a period of 20 days.

Step 4: Filing of Forms

The forms SPICe+ and INC 32 are to be filed. An application for the PAN (Permanent Account Number) and TAN (Tax Deduction Account Number) can be made through the SPICe+ form.

The form INC 32 must be digitally signed and must be notarised by a Chartered Accountant or a Company Secretary or an Advocate.

Step 5: Filing of e-MoA and e-AOA

The e-MoA (electronic Memorandum of Association) and e-AOA (electronic Articles of Association) have to be filed online. While the former pictures the charter of the company, the latter delineates the rules and regulations of the company.

Step 6: Issuing the Certificate of Incorporation

Once the Registrar verifies the forms and the documents thus submitted, and if there are no discrepancies, the certificate of incorporation is awarded along with the PAN and TAN. The MCA also issues the CIN (Corporate Identification Number) to the company.  

Merits of Private Companies:

Private companies possess certain advantages that a public company does not possess

  • A private company has no mandate on the minimum required paid-up capital
  • A private company is a separate legal entity in the eyes of law. The company can hold and purchase assets on its own
  • The liability of the members of the company is limited and is proportional to the shares held by them. If a member does not have any dues pending towards the shares purchased, then the member is not liable to pay any debts of the company, even if the debts remain unpaid
  • A private company can easily raise funds from Venture Capitalists and Angel Investors
  • In the case of a company limited by shares, the transfer of shares is easy. It merely requires the share transfer form to be signed and filed and be handed over to the buyer along with the share certificate
  • A private limited company enjoys perpetual succession or uninterrupted existence for eternity unless the company is legally dissolved. The company is unaffected by the death or dismissal of any member
  • The Private company is allowed to incur 100% of Foreign Direct Investment (FDI)
  • A private limited company enjoys credibility amongst clients and the public in general.

Demerits of Private Companies:

  • One of the gravest disadvantages private companies suffer from, is the restriction pertaining to the transfer of shares
  • There cannot be more than 200 members in a private limited company
  • A private limited company is barred from issuing a prospectus to the public
  • The shares of a private limited company cannot be quoted on the stock exchange.

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