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.
The Restriction of Transfer of Shares: A private limited company has to restrict the transfer of its shares. Thus the shares of private limited are not freely transferable. Before a shareholder transfer the shares to someone outside the company, it has to be offered to existing shares.
Limitation on Maximum Number of Shareholders up to 200: A minimum of two shareholders is required in a private Limited Company. However, the maximum number of shareholders can be up to 200, except for one person company (OPC), where only one shareholder is permissible with a mandatory nominee.
Prohibition on Public Issue: The articles of a private limited company must prohibit any invitation or advertisement to the public at large for subscription to its shares. However, the shares may be allotted to a select group of a person through private placement.
For the verbatim text of section 2(68) of the companies act, 2013, you are requested to refer to the official gazette or mca.gov.in. Following are the salient points that are the feature of a private limited company.
- Only a company can be a private limited company, hence lets us understand the meaning of a company. The English meaning of the company is “a number of individuals assembled or associated together.” or you can say that a company is “a business organisation selling goods or services”. However, section 2(20) of the companies act defines a company to mean only those that have been incorporated under the companies act, 2013 or under any previous companies act. This means that a company shall come into existence only when the registrar of companies issues a certificate of incorporation.
- Under the companies act, there are several kinds of companies that can be incorporated based on the business objective of the applicant, for example, large corporations prefer a Public Limited Company, For finance activities one can incorporate a Nidhi company, farmers can register a producer company, for welfare and charitable activities section -8 company is a right choice. Out of several company types, the most popular among the start up is a private limited company.
- A private limited company is defined explicitly under section 2(68) of the companies act that puts some restrictions on it to be enforced by way of its articles of association. Now we are discussing in detail as to what are the restrictions prescribed under the companies act for a private limited company.
- Restriction on Share Transfer: The ownership in the company is defined by the percentage of shareholding in the equity share of the company. Since a private limited company is considered a closed group of like-minded people coming together to form into a company, hence the free transfer of shares are not allowed. Suppose a shareholder wishes to transfer a part of his shareholding or wants to exit the company entirely. In that case, the shares are first offered to other existing shareholders and then to outside people or entities. In this way, the private character of the company is retained. It is important to note that the transfer of shares in the private limited company needs to be approved by the board of directors of the company.
- Number of Shareholders: In a private limited company, the minimum number of two and a maximum of two hundred shareholders are allowed. However, in the case of a one-person company, only one person shall be the shareholder. To count the number of shareholders the Join holders are considered as one shareholder, and the shares issued to employees under ESOP are not considered.
- Prohibition on Public Issue of Share: The private limited companies are prohibited from advertising or inviting the public to subscribe to the shares of the private limited company. In case you intend to issue shares to the public at large, you should consider registering a public limited company.
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Different Types of Private Company:
A private limited company can be of several types based on the capital, liability or business activity.
- Small Company: When the authorised capital of the company is less than Rs Fifty Lakhs, then such companies are known as a small company under the companies act. Some of the compliance and reporting related provisions do not apply to a small company.
- Based on Liability: The companies act does have provision for registering a company with limited liability or with unlimited liability. However, we do not extend our services relating to the incorporation of a company with unlimited liability. The private limited companies are the companies registered with limited liability to its shareholders. By limited liability, we mean that the shareholders of the company shall not be liable for the debts or liabilities of the company and the shareholder’s liability is limited to its unpaid share of the share capital subscribed by such shareholder.
- One Person Company: The concept of the single-person company is relatively new, and it was introduced in India by the Companies Act, 2013. Only one person owns the OPC. However, there can be up to fifteen directors. In an OPC the capital is limited to fifty lakhs, and turnover should increase beyond two crores.