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.
Introduction
Launching a new company brings forth the often perplexing question of how much share capital to introduce, especially for those venturing into online company registration. This quandary is not exclusive to promoters, and it becomes particularly complex when minimal capital is required. The Companies Act, 2013, plays a pivotal role in shaping the contours of this decision-making process.
In scenarios where a substantial capital infusion is warranted, planning is straightforward. The challenge arises when co-founders, constrained by limited resources, grapple with determining the optimal share capital for their venture. Understanding the nuances of Authorised Capital and Paid-up Capital becomes paramount.
The Companies Act, 2013, dispels the notion of a mandatory minimum paid-up capital, emphasising the importance of maintaining ₹ 100,000 as Authorised Capital. To navigate this intricacy effectively, prospective business owners must acquaint themselves with these terminologies and the types of capital. This knowledge not only streamlines the company registration process but also empowers promoters to make informed decisions that align with the financial dynamics of their envisioned enterprise.
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.
Vakilsearch’s company name generator has many company name suggestions for you to use on your new unregistered company.
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.
Purpose of an Authorised Capital
Its purpose is to limit the authority of directors in issuing additional shares, potentially influencing the company’s capacity to steer its course. Additionally, it plays a role in upholding equitable profit distribution. Often, a fraction of the authorized capital remains unutilized intentionally, serving as a precautionary reserve for potential future funding needs.
Salient features of an Authorised Capital
The characteristics that distinguish authorized share capital from other types can be briefly discussed as follows:
- Establishing Trust and Reliability: Companies often opt for listing on the stock market to foster trust among the public, enabling them to generate funds by selling shares. This method stands out as the most reliable and trustworthy means of securing external funding for the business.
- Persistence with the Company: Authorized share capital remains integral to the company until the point of liquidation, ensuring its continual availability for strategic use.
- Empowering Shareholders: Acquiring shares in a company grants individuals the authority to participate in selecting the company’s management, offering shareholders a sense of involvement and influence.
- Dividend Benefits: An advantageous feature of shares lies in their ability to provide investors with a share of the company’s earnings in the form of dividends. The amount of dividends is determined by the shareholder’s investment in the company.
Significance of Minimum Paid Up Capital for Private Limited Company
Understanding the importance of minimum paid-up capital is paramount for the financial well-being of a Private Limited Company. This significance manifests in several key aspects:
Debt Reliance vs. Equity Investment:
The level of paid-up capital indicates the company’s reliance on equity investment over debt financing. A substantial paid-up capital implies reduced dependence on external borrowing, mitigating financial risks associated with servicing debt, such as interest payments and repayment obligations.
Growth Potential:
A fully paid-up capital status empowers a company to raise additional capital, showcasing its capacity for expansion. This flexibility allows for exceeding approved capital limits or borrowing funds, enabling investments in new projects, product development, or market expansion.
Market Health Indicator:
The amount of paid-up capital on a company’s balance sheet serves as a vital indicator of its financial health. A higher paid-up capital signifies a robust financial foundation, instilling investor confidence. It reflects the company’s success in attracting capital from shareholders, translating into a vote of confidence in its business prospects.
Equity vs. Debt Comparison:
The equity-to-debt ratio, influenced by paid-up capital, is pivotal for assessing financial stability. A higher equity-to-debt ratio denotes a more resilient financial state, showcasing lower financial leverage and reduced insolvency risk. Conversely, a higher debt-to-equity ratio in a company raises financial risks, potentially leading to instability.
Different Types of Capitals
Here’s a distinct exploration of various capitals, excluding authorized capital:
-
Issued Capital:
The allotment of shares to shareholders constitutes the “issued capital,” with a clear restriction—this capital cannot surpass the authorized capital of the company.
-
Subscribed Capital:
The amount that the public commits to when a company issues capital is termed “subscribed capital.” To illustrate, if a company issues 1000 shares at a face value of ₹10 each, and only 500 shares are subscribed, the total subscribed capital would be 500 * 10, equating to ₹5000.
-
Called up Capital:
When a shareholder possesses a certain share percentage of a company’s capital but only pays the portion summoned by the business, it is referred to as “called up capital.”
-
Paid-up Capital:
The cost a shareholder incurs to acquire a share in a specific business constitutes the “paid-up capital.”
-
Uncalled Capital:
The portion of total capital that remains unpaid by the business to its shareholders is denoted as “uncalled capital.”
-
Reserve Capital:
Reserved capital signifies the amount of capital retained by a business that has yet to undergo liquidation.
Authorised Capital differs from Paid-Up Capital
Here is the information presented in a table format:
Authorized Capital |
Paid-up Capital |
| Authorized capital is the maximum number of shares that a corporation may issue to its shareholders. | Paid-up capital is the whole cost of the shares that were issued to the general public. |
| A firm can increase its authorized capital by getting board’s permission. | Authorized capital includes paid-up capital. It can therefore only be raised if the authorized capital is raised. |
| When determining a company’s net worth, the authorized capital is not taken into account. | The paid-up capital is taken into account when determining a company’s net worth. |
| Never can the authorized capital exceed the paid-up capital. | A business may raise as much paid-up capital as is authorized. |
How to Alter the Authorised Share Capital of a Company?
To increase the authorized share capital of a company, follow these steps:
- Review Articles of Association (AOA):
Before proceeding, check the AOA for a clause related to increasing authorized share capital. If not, modify the AOA.
- Convene a Board Meeting:
Call a board meeting to obtain approval for the increase in authorized share capital. Set a date for an extraordinary general meeting (EGM) to seek shareholder approval.
- EGM Approval:
Hold the EGM to gain shareholder approval for the increased authorized share capital through an ordinary resolution.
- File Form SH7:
Within 30 days of the EGM, file Form SH7, including required documents like the special general meeting notice, an authorized copy of the resolution, and the amended memorandum of association.
- Registrar Approval:
Following the outlined procedure in the Companies Act, the registrar will approve the filing, updating the authorized share capital on the MCA portal.
- Distribution of Shares:
After increasing the authorized share capital, consider issuing additional equity shares to raise the paid-up share capital of the company.
Various Sources of Paid-Up Capital for a Private Limited Company
The minimum paid-up capital for a Private Limited Company serves as a cornerstone in its financial structure, and acquiring this capital involves tapping into various sources.
Here are the primary means through which Private Limited Companies can secure their minimum paid-up capital:
Par Value of the Shares:
The par value represents the nominal or face value of a company’s shares as specified in its Memorandum of Association (MOA). This basic value is assigned to each share and is crucial when raising capital. The par value is established at the time of incorporation and can be adjusted through MOA amendments.
Premium/Discount Value of the Stock:
Private Limited Companies in India enjoy flexibility in capital generation by issuing shares at either a premium or a discount to their par value. This flexibility encompasses two scenarios:
Premium Shares:
Issued at a price higher than their par value, these premium shares are indicative of a financially robust company experiencing high market demand. For instance, shares with a par value of ₹ 10 may be offered at ₹ 18 per share.
Discounted Shares:
Offered at a price lower than their par value, discounted shares provide companies with a rapid infusion of capital or aid during financial challenges. For example, shares with a par value of ₹ 10 might be sold at ₹ 4 per share.
Therefore, the minimum paid-up capital for a Private Limited Company can be procured through the par value of shares and by issuing shares at premium or discounted values. This strategic flexibility empowers companies to tailor their capital-raising approach based on their financial circumstances and prevailing market conditions.
What is the Requirement of Minimum Paid Up Capital for Private Limited Company?
In the historical context, the minimum paid-up capital for a Private Limited Company in India stood at ₹ 1 lakh, in accordance with the provisions of the Companies Act of 2013. However, pivotal changes in company law unfolded with subsequent amendments.
A transformative moment occurred with the Companies (Amendments) Act of 2015, reshaping the landscape. This amendment heralded the elimination of the requirement for a minimum paid-up capital for Private Limited companies in India. Entrepreneurs could now establish a Private Limited Company unburdened by the need to meet a specific minimum capital threshold.
Despite this removal of the minimum paid-up capital requirement, it’s essential to emphasise that an authorised capital of ₹ 1 lakh remains mandatory for initiating the formation of a Private Limited Company.
As of 2015, the paradigm has shifted, rendering the concept of a minimum paid-up capital obsolete for Private Limited companies in India. This pivotal alteration democratises the process of Private Limited Company registration, liberating entrepreneurs from the financial obligation tied to a stipulated minimum paid-up capital. This evolution enhances accessibility and fosters a more conducive environment for aspiring business owners to embark on the journey of establishing a Private Limited Company in India.
FAQs
What is the minimum turnover for a Pvt Ltd company?
There is no specific minimum turnover requirement for a Pvt Ltd company. Private Limited Companies can be formed irrespective of turnover, offering flexibility for startups and small businesses to establish themselves without stringent financial prerequisites.
What is the cost of running a Private Limited Company?
The cost of running a Private Limited Company varies based on factors like compliance, infrastructure, and employee salaries. It typically includes registration fees, annual compliance costs, and operational expenses, making it essential for businesses to budget effectively for sustained operations.
Can a single person own a Pvt Ltd?
Yes, a single person can own and operate a Private Limited Company. The Companies Act allows for the formation of a One Person Company (OPC), providing the benefits of limited liability while catering to the needs of sole entrepreneurs, ensuring legal structure and protection.
Which is better, an LLP or company?
The choice between an LLP (Limited Liability Partnership) and a company depends on the business's nature and goals. LLPs offer flexibility, while companies provide strong corporate structure. For startups seeking flexibility, an LLP may be suitable, while larger enterprises often opt for the structured governance of a company.
Can I buy a property in Pvt Ltd company?
Yes, a Pvt Ltd company can buy and own property. It offers the advantage of limited liability and separate legal identity, allowing the company to acquire assets like real estate. However, legal and financial considerations should be evaluated, and due diligence conducted before making such a significant decision.
