Company IncorporationPrivate Limited

How Much Capital is Required to Start a Private Limited Company?

It was mandatory for a private limited company to invest a stipulated amount as capital a few months ago. Thanks to the amendments that followed, the condition has now been struck down much to the delight of the budding entrepreneurs. In this article how much capital is required to start a private limited company.

How Much Capital is Required to Start a Private Limited Company : Introduction

Kickstarting a new Private Limited Company in India is not only exciting but also scary for one main reason – The investment! This is more so the case when an entrepreneur wishes to incorporate the business as a private limited company.  Investment, in any business, is the most pivotal ingredient which decides the fate of the business. More often the investment is raised by issuing shares to the shareholders.

Why a Private Limited Company?

A private limited company is the choice of businesses that aim to make it big and grab greater visibility. In India, the majority of the businesses are registered as private limited companies. A private limited company on India is considered to offer the benefits of both a partnership and a public limited company. The directors and shareholders of a private limited company have greater autonomy to decide the course of the business. The revenue reaped by the company is appropriated as dividends to the shareholders of the company proportional to their shares.

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Prerequisites for a Private Limited Company:

  •   Director:

A Private Limited Company must have a minimum of 2 directors and can have a maximum of 15 directors. A private limited company can appoint a foreign director. However, it is mandatory that at least one of the directors shall be an Indian citizen

  •   Shareholders:

There should be at least 2 shareholders to incorporate a private limited company, while the company can accommodate a maximum of not more than 200 shareholders

  •   Minimum Capital Requirement:

Earlier, the Companies Act, 2013 mandated a minimum capital of ₹100,000 in order to incorporate a private limited company. However, the amendment Act, in 2015 repealed the provision.

Authorised capital of a Private Limited Company:

Authorised capital marks the maximum share capital out of which shares can be issued in a private limited company. This authorised capital is usually cited in the Memorandum of Association of the company and is mostly fixed as ₹100,000. However, it can be increased with the consent of the shareholders and by paying the required fee to the Registrar of Companies (RoC). The authorised capital denotes the net worth of a company.

For instance, say a company XYZ private limited has an authorised capital of 5 lakhs. This would imply that this company can issue shares, worth up to 5 lakhs to its shareholders. While the company can decide to issue shares lesser than the decided authorised capital, say 3 lakhs, the company cannot exceed the threshold limit of 5 lakhs.

Paid-up capital of a Private Limited Company:

Paid-up capital, on the other hand, is the actual amount of money that is acquired by the company by means of issuing shares to the shareholders. The paid-up capital is always lesser than the authorised capital of the company, as the company cannot issue shares over and beyond the authorised capital. The paid-up capital thus received is often utilised for managing the expenses of the company.

Earlier there was a prerequisite pertaining to the minimum paid-up capital of a private limited company wherein it was mandatory to have a capital of ₹100,000. This would imply that a minimum of ₹100,000 should be used to purchase the shares by the shareholders to commence the business. However, the Companies Amendment Act, 2015 repealed this requisite, thus enabling the entrepreneurs to incorporate private limited companies with no hindrances.

Prior to the amendment, it was mandatory to deposit the stipulated ₹100,000 in the company’s bank account. Now that the provision is repealed it’s merely enough to state the paid capital on the papers. 

With this provision in place, many businesses have started to prefer private limited companies over other corporate structures such as Limited Liability Partnership (LLP) firms, as in the latter raising funds is a huge challenge. A private limited company was always favored for the limited liability, tax efficiency, and credibility it offers amongst the clients. The mandate for the minimum capital being torn down has definitely leveraged the scope of private limited companies and has pushed it a little ahead in the race amongst the corporate entities.

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