Private Limited companies, as defined by the Companies Act ,2013 are those that have a maximum of 200 shareholders. No private limited companies are allowed to invite the public to invest in their shares, nor can they list them on any stock exchange. Private limited companies are the most common type of business entity in India and are regulated by the Ministry of Corporate Affairs (MCA).
Under this Act, private limited companies cannot issue a prospectus or advertisements inviting deposits from the public. Raising capital funds from individuals or institutions through private placements does not need approval from the Securities Exchange Board of India (SEBI). Firms must comply with regs, such as filing annual returns to MCA and other financial statements by set deadlines.
Define Private Limited Companies
The Companies Act, 2013 defines a private limited company as one with restricted share transferability and public subscription prohibition according to Section 2(68). This sets it apart from a public company. Private limited companies are allowed to have no more than 200 members. Excludes present/former employees who are members, and those with joint ownership count as one.
Decision-making power in a PLC lies with its board of directors, acting as trustees for shareholders. Promoters of this org are protected, as only corporate assets can be used to settle debts if payments are not made.
Characteristics of a Private Limited Companies
The characteristics of a private limited company are:-
- Limited Liability: Private limited companies are legally liable for their debts and obligations, so shareholders will not be held personally responsible for any losses or debts incurred by the company.
- Smaller Board of Directors: Private limited companies typically have a smaller board of directors than public companies, allowing them to make decisions more quickly and efficiently.
- Flexible Ownership Structure: Private limited companies can create unique ownership structures that allow them to raise capital while still maintaining control over the direction of the business.
- Easier Governance Requirements: Since private limited companies are often owned and managed by fewer people, they can often operate without having to adhere to as many regulations and governance requirements as public firms must follow.
- Professional Management Structure: A private limited company has a professional management structure which includes appointing directors who oversee the running of day-to-day operations while taking into account long term goals set by shareholders. This helps ensure smooth functioning within an organisation even when there are changes at higher levels such as ownership shifts or strategic direction changes.
Types of Private Limited Companies
Following are the three types of private limited companies based on the liabilities of their members.
- Shares in a “limited by shares” firm limit shareholders’ liability; they can’t be held liable for losses beyond the value of their stock.
- The guarantors pledge to contribute a nominal amount in the event that the company limited by guarantee is wound up.
- Members’ own contributions in an unlimited liability company may be used to cover losses if the business is wound up and can’t pay debts.
The 2013 New Company Act permits single-member private limited companies which are called one person companies
Formation of a Private Limited Company
The Companies Act registers a PLC and limits it by shares owned by private shareholders, who generally number two or more. This type of company also has its own legal identity distinct from its owners. The main advantage of forming a PLC is that it limits the liability of its owners to their contributions to the business.
Most countries require that at least two directors appoint a PLC, with no maximum limit. In addition to two shareholders being necessary, the authorized share capital must meet certain criteria based on the type of company registering. In order to set up a company, one must submit the memorandum and articles of association, a certificate for the commencement of business, and (if necessary) an agreement between members. These documents outline how the company will be managed and operated.
Once all these requirements have been fulfilled, you can then proceed to register your startup with a relevant government body which is the Department for Promotion of Industry and Internal Trade in India.
The Benefits of Private Limited Companies
Private limited companies have the advantage of staying private and avoiding public scrutiny.
- Easier to raise money: Private limited companies have access to a limited pool of investors and can usually obtain funds more easily than public companies.
- More flexibility in decision-making: Private limited companies do not need to comply with the same regulations as public companies, allowing them to make decisions more quickly.
- Greater privacy: Publicly traded companies must disclose detailed financial information about their operations, while private companies can keep such information confidential.
- Less shareholder pressure: Private limited companies do not have the same level of scrutiny from shareholders that public limited companies face, so they are less likely to be affected by short-term market fluctuations or investor sentiment.
Limitations of Private Companies
The meaning of private limited company carries with it certain limitations. These include:
- Limited Access to Capital: Private limited companies are limited in the amount of capital they can access because they do not have access to public markets or investors and must rely on private equity, debt financing, and other forms of private funding.
- Regulatory Requirements: Due to their lack of transparency, private limited companies may be subject to more stringent regulations than their publicly traded counterparts. This can add extra costs and paperwork that can limit growth potential or profitability.
- Lack of Liquidity: Investing in a private limited company is a long-term commitment, as there is no market for selling shares quickly or easily, like with stocks traded on an exchange. It can be difficult for investors to exit before the company goes public or is acquired by another entity if needed.
Registering a private limited company online is an invaluable business entity structure provided by the 2013 Companies Act, offering numerous benefits to businesses. With online private registration, businesses can quickly and easily register their business in India without any hassle. It’s perfect for entrepreneurs needing quick start-up, being simple, efficient, and cost-effective. Entrepreneurs in India can benefit from registering their business online, saving time, and money and reducing stress.