A private limited company's liability protection and ease of transferability appeal to most medium and large businesses. This article examines a few disadvantages associated with a private limited company, particularly for micro and small businesses.
A private limited company offers several advantages to most medium and large businesses, including liability protection and ease of transferability. Private limited companies are companies whose articles of association restrict the transferability of shares, according to the Companies Act 2013.Private limited companies differ from other types of public companies in this regard.
In light of the rapid growth of businesses across the country, there is a need to understand the different types of business entities in India. It should be noted that private limited companies may not be suitable for all businesses, particularly micro and small businesses.
Definition
Private limited companies are defined in Section 2 (68) of The Companies Act, 2013, as private entities with limited liability. Unlike other public companies, it does not freely transfer its shares to the public. A private limited company owns all its profits and liabilities, and stakeholders are not responsible for the company’s debts.
Now you do not need to fear approximately growing an agency name. Use Vakilsearch Company Name Check to view the listing of to-be-had companies.
Types of private limited companies
Here are some different types of private limited companies:
By Shares
Private companies limited by shares are limited in their capital by owing money to their shareholders. The MOA (memorandum of association) limits the liability of shareholders to the number of their shares or the amount remaining unpaid. There is no liability for shareholders to pay more than their share capital.
Company by Guarantee
An individual shareholder’s liability in a private limited company limited by guarantee is limited to the amount he guarantees in the Memorandum of Association. As a result, they can only be liable for the amount they have guaranteed. This guarantee may also be invoked only if the company is permanently closed.
Unlimited Companies
Unlimited companies are separate legal entities. An unlimited corporation is a business with no limitations on its members’ liability. Members may be liable for the entire company’s debts. Members’ personal assets can be used to pay off company debts.
Learn About Company Incorporation in India
Essential Documents Required for Setting up a Private Limited Company
To form a private limited company, you will need the following documents:
- Memorandum of association: This document discusses the purpose of setting up a business, its nature, its objective, and its capital clause. Corporate documents define a company’s relationships with shareholders and specify its goals. A charter is also called a company charter.
- Article of association: The internal operating system of the company is discussed in this document. It explains the management process, duties and responsibilities of each member, dividend policy, shareholder meetings, and board appointments.
- Certificate of incorporation: Following the submission of all required documents for registration, the directors receive a certificate or license. In India, this document is issued by the Registrar of Companies (ROC) as the primary authentication document for a company.
- Other documents: In addition, directors and shareholders must provide ID proof (PAN card, Aadhaar card), address proof (ration card, voter id), rental agreement, NOC from the property owner, and a copy of the sale deed for the owned property.
Registration Process
Vakilsearch can register your private limited company within 7 days. There’s a process and costs involved in registering a private limited company that doesn’t apply to unregistered entities like proprietorships. Once registered, a private limited company has a lot of powers and rights, which makes opening a bank account or getting a payment gateway easy. Since proprietorships and partnership firms are considered unregistered business entities, opening a bank account or getting a payment gateway is hard post-registration.
Compliance Formalities
After incorporation, a private limited company must comply with a number of requirements. A company must hold board meetings and general meetings, have its accounts audited, maintain a statutory register, and file an annual return with the Ministry of Corporate Affairs. Regardless of the type of business entity, a company must also comply with tax and labour laws and corporate compliance formalities.
Division of Ownership
The main disadvantage of private limited companies is that they require at least two directors and shareholders. Any sole entrepreneur who wants to start and operate a business alone cannot form a private limited company. Thus, any major decision a company takes requires two people’s consent. Even if one shareholder holds a negligible amount of shares, the company would still need two shareholders.The government introduced one Person Companies to empower entrepreneurs who wish to start and run their own businesses. The main disadvantage of a one-person company is the requirement to convert to a private limited company after crossing ₹2 crores in annual sales.
Personal Liability
As a company, it is fully responsible for its debt and has unlimited liability. A company’s members are the only ones protected from liability. As follows, directors and members may also be liable in some cases:
- When the name of a company is misrepresented in a contract or act, the person who made the contract or act is personally liable;
- During the winding up of a company, persons who are knowingly parties to fraudulent conduct are liable for the company’s debts;
Winding Up of Company
In comparison to an unregistered partnership firm, winding up a company can be complicated, time-consuming, and expensive. As a result, it is important to register a company only when the promoters are serious about using it for business purposes.
Advantages of Private Limited Company
In India, private limited companies are the most preferred type of legal entity despite the disadvantages listed above. The benefits of incorporating and doing business as a private limited company should also be considered before choosing a business entity.
Also Read:
- What is Private Limited Company?
- Steps for Company Incorporation
- How to Incorporate a Private Limited Company?
- What Is the Process to Register a Company in Chennai?
