Meaning of Private Limited Company

  • Setindiabiz Team
  • January 2, 2024
Legal Meaning of Private Limited Company | As per the Companies Act 2013.

What is a Private Limited Company? Discover its essence and key features in our insightful blog. Delve into the details of Private Limited Company meaning, legal definition, and requirements of formation. Our objective is to highlight what makes this structure the most suitable choice for Startup formation among entrepreneurs. If you have any questions, you can post in the comments section or consult our experts! We also provide expert assistance in the Private Limited Company registration process.

BRIEF SUMMARY
Legal Meaning of Private Limited Company | As per the Companies Act 2013.
A Private Limited Company, often hailed as a versatile and widely preferred business structure, holds a distinct identity in the corporate world. At its core, it is an independently incorporated legal entity, characterized by limited liability for its shareholders. This means that the personal assets of shareholders remain safeguarded, minimizing individual risk of losing assets during unprecedented circumstances like bankruptcy and closure. Delving deeper about private limited company meaning, this article ims to illuminate the intricacies of its structure, governance, and advantages to provide a foundational understanding to entrepreneurs and business enthusiasts alike.

What is a Private Limited Company in India?

To understand Private Limited Company definition, you must first understand what the terms “Private” and “Limited” mean. The term “Private” indicates the restricted nature of share transfer in the company. The shares of a Private Limited Company cannot be listed and traded on Stock Exchange Markets since these are publicly accessible. Moreover, these companies cannot transfer their shares to the general public as well. Considering the term “Limited”, it means that the owners are going to receive limited liability protection after incorporating their Private Limited Company. Crucially, the concept of limited liability ensures that shareholders’ financial responsibilities are confined to the value of their shares, safeguarding their assets from any risk of loss. These two terms sum up the concept of a Private Limited Company as a whole and lays down the foundation for understanding its legal meaning under the Companies Act.

Private Limited Company Meaning Under Companies Act, 2013

Section 2 (68) of the Companies Act, 2013, defines a Private Limited Company on the basis of transferability of shares and the maximum limit on the number of its shareholders. The right to transfer shares in a Private Limited Company is restricted to the extent that the shares cannot be traded on public platforms like Stock Exchange Markets, and are not open for sale to the general public. They can only be sold to legitimate investors or promoters in a private manner. Moreover, the Companies Act, also prescribes the maximum number of shareholders for a Private Limited Company as 200, meaning that under no circumstance can a Private Limited Company have more than 200 shareholders. For a deeper understanding about Private Limited Company, let’s dig deeper into a few of its characteristic features.
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Private Limited Company Characteristics

Private Limited Companies, integral to the corporate landscape, exhibit distinctive characteristics that set them apart as a favored business structure. Understanding these key traits is pivotal for anyone seeking clarity about private limited company. With a foundation built on legal intricacies and operational nuances, a closer examination of Private Limited Company characteristics not only unravels its essence but also helps entrepreneurs navigate its complicated incorporation and compliance procedures with ease. Let’s explore these key characteristics in detail.
  1. Distinct Legal Identity: A paramount feature of a Private Limited Company is its distinct legal identity, owing to its mandatory incorporation under the Companies Act. This characteristic ensures that the company can enter into contracts, own assets, and be held liable for non-compliance in its own name, distinct from the individual owners.
  2. Separate Ownership and Management: Private Limited Companies show a separation between ownership and management. Shareholders, who own the company, appoint a board of directors to oversee day-to-day operations. This dichotomy facilitates efficient decision-making, allowing shareholders to focus on strategic aspects while the directors handle the company’s daily affairs.
  3. Limited Liability for Owners: Perhaps one of the most appealing aspects for investors is the limited liability feature of a Private Limited Company, which ensures that the personal assets of shareholders are safeguarded. In the event of financial challenges or legal issues, shareholders are liable to pay only up to the amount invested in the company in the form of subscribed capital.
  4. Indefinite Existence: Private Limited Companies enjoy perpetual succession, meaning the company continues to exist irrespective of changes in ownership or management. This characteristic provides stability and longevity, allowing the business to transcend individual transitions and persist as a continuous entity.
  5. Minimum Number of Members and Directors: Private Limited Companies, while fostering shared ownership, are restrictive in terms of size. There is a minimum requirement for both members and directors, ensuring that even smaller ventures can adopt this structure without undue administrative burden. Private Limited Company minimum members and directors can be 2, whether Indian or foreign in origin.
  6. No Requirement of Minimum Capital: Unlike other business structures, Private Limited Companies do not have a stringent minimum capital requirement. This characteristic allows businesses to start with a reasonable capital investment, promoting accessibility and encouraging entrepreneurs to initiate ventures without excessive financial constraints.

Private Limited Company Classification

Private limited companies can further be classified into distinct subcategories, each serving unique purposes. These include a Small Company, Section 8 Company, and One Person Company. While all fall under the umbrella of Private Limited Companies, they differ slightly in purpose and features. Refer to the table below to understand each of these in detail.
Classification of Pvt Ltd Company Purpose
An OPC, falling under the Private Limited Company classification, is singularly owned by an individual shareholder. This owner bears the responsibility of investing all the capital required by the company. As the sole proprietor, they enjoy the entirety of the company's profits, with liability limited to the subscribed capital amount.
Small Company
A Small Company, falling under the Private Limited Company classification, is characterized by a minimum paid-up capital of Rs. 4 crores and a minimum annual sales turnover of Rs. 40 crores. This classification caters to businesses of a more modest scale, providing regulatory flexibility while ensuring a structured corporate framework.
Even non-profit organizations find a place within the Private Limited Company classification under Section 8 of the Companies Act. A Section 8 Company can be established as either a Private Limited Company or a Public Limited Company. The primary purpose of such companies is to contribute to the promotion of art, culture, religion, and charity, showcasing the adaptability of the Private Limited Company structure to diverse organizational objectives.

How to Register a Private Limited Company?

Private Limited Company Registration is an online process that can be completed on the MCA website. For this purpose, the required application in SPICE Plus form is filled out and submitted online with the requisite fees. However, applicants must be mindful of meeting the Private Limited Company minimum members and directors requirement before starting the process. Also, a few other requisites like a valid name, registered address, and adequate capital must also be met for successful incorporation. In the table below, we have listed all the requirements you need to meet for Private Limited Company incorporation in India.
Minimum Requirements List of Documents
  • 2 to 200 Shareholders
  • 2 to 15 Directors
  • One Resident Director
  • A Unique & Valid Name
  • A Registered Address
  • Adequate Capital
    Documents of Promoters
  1. PAN Card
  2. Aadhar Card
  3. Photograph
  4. Recent Electricity Bill / Bank Statement
    Documents of Registered Address
  1. Electricity Bill in Company’s Name
  2. NOC from Premises Owner
    Legal Drafts
  1. MOA (Memorandum of Association)
  2. AOA (Articles of Association)

Why is Private Limited Company A Suitable Choice?

A Private Limited Company, by definition, is a highly suitable structure for entrepreneurs. It offers the pivotal advantage of limited liability, shielding personal assets from business debts. This legal entity operates independently, elevating the company’s credibility and establishing a robust legal standing. Entrepreneurs find it advantageous for fundraising, as shares can be issued without jeopardizing personal financial security. The perpetual existence of a Private Limited Company ensures business continuity, irrespective of changes in ownership. Additionally, the incorporation structure provides employee stock options, attracting skilled talent. With tax benefits, easy share transferability, and a defined compliance framework, a Private Limited Company has become the most preferred choice entrepreneurs, promising growth and professional success.

Understanding the essence of a Private Limited Company is integral for entrepreneurs navigating the business landscape. The private limited company meaning encompasses key characteristics such as limited liability, perpetual existence, and a separate legal entity, all contributing to its appeal for businesses in India. As we define private limited structures and explore their significance, it’s evident that they offer a robust framework, allowing for flexibility, credibility, and growth. With only 2 members required for a private company, this structure aligns seamlessly with the evolving needs of businesses in India. In essence, a private limited company provides a comprehensive solution for entrepreneurs, combining legal protection, financial efficiency, and a professional stature for building and sustaining a successful venture.

Conclusion

FAQs

Q1: What is Private Limited Company definition under Companies Act?

Private limited company meaning according to Section 2 of the Companies Act is a company that has restricted its transfer of shares and has a maximum of 200 members.

Q2: What is the minimum members requirement for a Private Limited Company?

Private Limited Company minimum members requirement is only 2. These members may be individuals or non-individuals, foreign or Indian in origin.

Q3: What are the key Private Limited Company characteristics?

5 Private Limited Company Characteristics:

  1. Distinct Legal Identity 
  2. Mandatory Incorporation 
  3. Separation between Ownership & Management
  4. Indefinite Existence 
  5. Limited Liability for Owners

Q4: How does a Private Limited Company differ from other business structures?

Unlike other structures like Partnership Firms and Sole Proprietorships, a Private Limited Company offers limited liability to its members and enjoys perpetual existence, meaning it continues to operate despite changes in ownership. These distinctions make it a preferred choice for entrepreneurs in India.

Q5: How to Register a Private Limited Company?

To register a Private Limited Company, follow these steps:
  • Step 1: Choose a Unique Name and check for availability.
  • Step 2: Obtain DIN and DSC for promoters.
  • Step 3: Draft the MoA and AoA
  • Step 4: Apply for Company Registration
  • Step 5: Submit Documents, and requisite fees 
  • Step 6: Receive Certificate of Incorporation, Company PAN & TAN

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