Private Limited Company is a preferred choice for Startup India & very popular among the new age entrepreneurs. It is necessary to understand the actual legal meaning of the term Private Limited Company as defined under the Companies Act, 2013. The intent is to provide an easy to understand explanation of the term Private Limited Company so that the startups are well aware while they decide to start a Private Limited Company in India. The Act provides certain restrictions on a Private Limited Company compared to a Public Limited Company; we advise you to read the entire post for better understanding. Your questions and feedback are welcome in the comment section of this post.
Section 2(68) of The companies act, 2013 defines the private limited company that restricts following actions by inserting the appropriate clauses in the Article of Association.
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General Understanding of the word “Company”
A Company is a legitimate form of business entity where a group of individuals come together with the common goal of owning, operating and investing in it. The ownership in a company can be transferred by selling the shares issued by the company, either to its promoters or to its investors. All sorts of companies established in India are incorporated under the Companies Act, 2013.
Legally, companies can be categorised into Private Limited and Public limited companies based on their formation and incorporation under the Companies Act. Here, we will elaborate on a Private Limited company, its meaning, and its features. However, for a better understanding, we have also compared it with other types of companies in further sections.
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Legal Definition of Private Limited Company in the 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. The shares of a Private Limited company can only be sold to legitimate investors or promoters, and that too in a private manner. This is quite contrary to a public limited company, where the company itself can be listed on Stock Exchange Market and trade its shares, even with the general public, on the platform. 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.
Essential Elements of a Private Limited Company
Before beginning the process of forming a Private Limited Company, you must be mindful of certain essential elements without which the foundation of a Private Limited Company is impossible. These include the name of the company, the registered address of its principal place of business, the prescribed minimum capital, and the minimum number of directors as well as shareholders.
| Essentials of a Private Limited Company | |
|---|---|
|
Name of the Company |
Minimum 2 directors |
|
Registered Office Address |
At least 1 resident director |
|
Minimum 2 Shareholders |
Certain amount of capital |
A private Limited Company can only be formed if it has at least 2 members or shareholders. These shareholders shall subscribe to a certain amount of shares and pay the applicable capital to the company. Although there is no prescribed minimum capital required to set up a Private Limited Company, it is obvious that it cannot operate without a capital. Therefore, the shareholders must invest some amount of capital into the company for its smooth functioning.
Additionally, the management of a Private Limited Company is controlled by its directors, without any involvement of the shareholders. The shareholders of a Private Limited Company must appoint at least two directors for controlling the management of the company. To get appointed as the director, an individual must possess a Director Identification Number or DIN issued by the Ministry of Corporate Affairs. Notably, out of all the directors that a Private Limited Company has, at least one must be a resident Indian, or must have resided in India for at least 182 days in the immediately preceding calendar year.
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The most essential elements of a private limited company that are indicative of its business brand are its name and its location. The name of a private limited company must be unique and original, and must not be identical to the name of an existing company. To learn more about the guidelines for name selection of a company, read our blog here. Additionally, the shareholders must choose a principal location for carrying out the business activities of the company.
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Sub-classification of a Private Limited Company
Private limited companies can be further classified into a small company, a section 8 company, and a one person company. All these types of companies can be incorporated as a Private Limited Company, but differ slightly in their purpose and features. Follow the table below for an elaborate discussion.
| Sub-classes of a Pvt Ltd Company | Their Purpose |
|---|---|
|
One Person Company |
An OPC is a private limited company that is owned by a single shareholder, who is responsible to invest all the capital that the company needs. As a single owner, he receives the entire share of its profits, but is liable only upto the amount of capital he has subscribed to. |
|
Small Company |
A small company is a Private Limited Company with a minimum paid up capital of Rs. 4 crores, and a minimum annual sales turnover of Rs.40 crores. |
|
Section 8 Company |
Even non-profit organisations can get established as companies under Section 8 of the Companies Act. A Section 8 company can either be established as a Private Limited Company or a Public Limited Company. The purpose of such companies is to work towards the promotion of art, culture, religion, and charity. |
Private Limited Company vs Other Business entities
Private Limited Companies, Public Limited Companies, and Limited Liability Partnerships are among the most preferable choices for business and startup owners in India. We have compared all the three business structures in the table below, so that making an informed choice becomes easy for you.
| Parameters | Private Limited Company | Public Limited Company | LLP |
|---|---|---|---|
|
Number of members |
Minimum 2 Maximum 200 |
Minimum 7 No maximum limit |
Minimum 2 No Maximum Limit |
|
Number of Directors |
Minimum 2 Maximum 15 |
Minimum 3 Maximum 15 |
Minimum 2 Maximum 15 |
|
Liability of owners |
Limited to the subscribed capital |
Limited to the subscribed capital |
Limited according to the LLP Agreement |
|
Minimum Capital |
No minimum limit |
Minimum Rs.5 lakhs capital |
No minimum capital |
|
Transfer of Ownership |
Restricted trading of shares |
Open trading of shares |
Signature on the LLP Agreement |
Why is Private Limited Company a preferred choice for investors?
A Private Limited Company is the most preferable choice for investors, promoters, and customers alike, owing to a number of benefits like limited liability for shareholders, and separation between management and ownership of the company. Moreover, a Private Limited Company has historically been a successful venture for the business world, and has often depicted an extremely high potential for growth. You can find tons of examples of Private Limited Companies that are single handedly ruling over the Indian and the Global Market, some of which include, Parle Product Private Limited, Google India Private Limited, American Express Private Limited, Hindustan Cocacola Private Limited, Jaguar and Company Private Limited, etc.
Conclusion
We hope that this blog was helpful to you in understanding all aspects of Private Limited Company. We have tried to explain its meaning in a layman language and in a legal language so that you can conveniently and in a wholesome manner, understand what a private limited company means to its owners, what benefits does it offer, and what are the essential elements of its composition.
