A private Limited company is a preferred mode of business for the Start up India, recognised by the ministry of corporate affairs. A company is a separate legal entity separate from its owners (known as shareholders). A private limited company comes into existence only after a certificate of incorporation is issued by the registrar of companies for a well defined main object and an approved authorised capital of the company.

Section 2(68) of The companies act, 2013 defines the private limited company that restricts following actions by way of inserting the appropriate clauses in their AOA.

(i) The transfer of shares is restricted: the shares in a private limited company can be transferred only with the consent of all existing shareholders.

(ii) The max number of shareholders to 200 except One Person Company, where the only person holds all shares.

(iii) That prohibits any invitation to the public for the issue of shares. In other words, the public issue is not allowed.

Though we intend to cover everything that is necessary to understand the meaning of the term “Private Limited Company”. However, for the verbatim text of section 2(68) of the companies act, 2013, we recommend you refer to the official gazette or the e-book on the Companies Act, 2013 maintained and updated by the ministry of corporate affairs at mca.gov.in. Following are the salient features of a private limited company.

(i) Meaning of Term 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 organization 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.

(ii) Different Kinds of Companies: 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 financial 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-ups is a Private Limited Company .

(iii) 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 what are the restrictions prescribed under the companies’ act for a private limited company.

(iv) 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 is not allowed. Suppose a shareholder wishes to transfer a part of his shareholding or want 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.

(v) 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.

(vi) 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.

Different Types of Private Company

A private limited company can be of several types based on capital, liability, or business activity.

(i) Small Company: When the authorized 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. 

(ii) 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.

(iii) 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.