A private limited company is a business entity held by a group of people. It is registered for pre-defined objects and owned by a group of members called shareholders. Startups and businesses with higher growth aspirations popularly choose a private company as a suitable business structure.
The business entity gets recognized as a company through its registration under the Companies Act of 2013 in India. The governing body is the Ministry of Corporate Affairs, widely known as MCA. The definition of a private company under the Act is provided here to help understand its basics. Section 2(68) of the Act defines a private company as follows:
A Company having a minimum paid-up share capital as may be prescribed and which, by its articles
(A) restricts the right to transfer its shares;
(B) except in the case of a one-person Company, limits the number of its members to two hundred;
(C) prohibits any invitation to the public to subscribe to any securities of the company.
Features of a Private Limited Company:
How is ownership defined?
Ownership is defined by share capital. The shareholders are the real owners of the company. The ownership of a private limited company is defined by share capital. Shares are equal parts of the company’s capital. The ratio of ownership is defined by the shares held by the owners of the company.
Such an arrangement in shareholding is one of the reasons investors are attracted to the company’s form of business. Equity ownership is a convenient option for them to pursue ownership in a business. Further, the shares can also be issued at a premium to introduce more capital, which eases the investment process.
Ownership in the form of shares is easily transferable compared to the capital of other structures, like an LLP. However, it is subject to restriction, as mentioned. If a shareholder is seeking an exit from the company, he is first required to offer the shares to an existing member and then to a third party. Further, the proposed transfer is required to be approved by the board members for the good of the company. This kind of restriction is put in place to retain the private ownership of the company. Moreover, shareholders cannot trade shares publicly or on the stock exchange like a listed company.
How many members can be in a private limited company?
Shareholders of a company are also known as members. To register a private limited company in India, a minimum of two members are required. Here, an individual or even a body corporate can become a member of the company. There is a ceiling on the number of members in a private company. The same is provided for a maximum of 200 members. The exception here is the one-person company, where there is only one member.
If two or more persons are holding shares jointly, they shall be considered one shareholder for this purpose.
Private companies are prohibited, by their definition, from inviting the public to subscribe to securities. Public companies can issue prospectuses to invite the public at large to raise capital. However, this is not allowed in the case of a private company. It is banned to invite subscriptions from the public by issuing such documents.
Why do people prefer private limited companies to startups?
A private limited company is preferred by startups because of the stability and growth opportunities offered by this structure. Further, it assures a separate legal existence from its members. So, it can involve contracts and legal proceedings in its name. Moreover, a company’s status is unaffected by any change in members or management.
A separate managerial board, i.e., the Board of Directors, is beneficial for members interested in investment purposes. Where the board works on remuneration, the members receive profit sharing in the form of dividends.
It also offers various funding options in the form of private equity, ESOP, and more. This makes it more suitable for external funding options. Thus, it is more preferred by VCs, angel investors, and other outside funding agencies compared to any other business structure. It is also preferred by banks and lending agencies because of the credibility that it holds as a corporate structure.
A private company is eligible to take advantage of registration under the Startup India Scheme of the Government of India. This scheme offers multiple benefits, including tax exemptions for recognized startups.
Because of these reasons, it is a priority for both family-based businesses and start-ups. Where service-based businesses tend to choose LLP, Pvt Ltd is suitable for product-based and growth-oriented businesses.
Types of Private companies:
There are various types of private companies, classified based on liability and capital. Here, we are discussing this in brief.
Based on Capital: A private company can be registered with or without share capital. The type of company based on capital is provided in the capital clause of the MOA of the company.
Based on liability:
The members’ liability can be limited or unlimited. Usually, companies are registered with limited liability in India. In the case of companies with shareholdings, members’ liability is limited to unpaid capital on subscribed shares. In the case of companies without shareholding, the agreed amount of liability in the form of capital is provided in the MOA of the company.
A one-person company, popularly known as an OPC, is a type of private limited company. It is a company registered with only one shareholder. This structure benefits a promoter who does not want to share ownership rights.
In addition to the above-mentioned types, there are other categories and types of companies so kindly contact- www.lawsathi.com