Trade and commerce were facing many problems due to the traditional practices and were not able to solve those problems due to these practices. For example, the unlimited liability of a sole proprietorship form of business triggered people to form partnerships, but that also proved to be too insufficient and risky. This was the time when companies emerged and one of the oldest forms is Private Companies.
The definition of a private company is given in Section 2(68) of the Companies Act, 2013. According to this section, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This is the basis through which we can differentiate between a private company and a public company.
This section also explains that a private company can have a maximum of 200 members (except one Person Company). These numbers of members do not include the present and former employees of the company. The two persons who own the shares of the company jointly are to be treated as one. In this definition, the paid-up capital was 1 lakh previously but after the amendment in 2005, it has been changed and now paid-up capital can be of any amount.
Features of Private Company
Below given are some features of a private company that makes difference between the forms of the company:
- No minimum capital needed– Before 1 lakh of paid up capital was required but after the amendment there can be any amount.
- No. of members– There is requirement of minimum 2 members and maximum can be 200.
- Restriction on transfer of shares– The private companies cannot transfer the shares to public freely like the public companies that is why they are not listed in stock market.
- “Private Limited”– It is compulsory for private companies to include the word ‘Limited’. It can be written as “Private Limited” or Pvt. Ltd.”.
- Privileges and exemptions– Private companies cannot freely transfer the shares to the public so the law has given them some exemptions which a public company can not enjoy.
Types of Private Companies
There are three types of private companies depending upon liability:
- Limited by shares- The liability of the members is limited to the amount unpaid to the company with respect to the shares held by them.
- Limited by guarantee- In case of company is wound up the members are liable to give money that they guarantee.
- Unlimited liability– the liability is unlimited of members. The assets and personal belongings can be attached and sold when the company is being wound-up.
In terms of the number of members, a private company can also be a One Person Company. These types of companies have just one member/shareholder as their promoter. The new Companies Act of 2013 introduced such types of companies.
Formation of Private Companies
For the formation of the company minimum of 2 members and a maximum of 200 members are required. Submitting an application to the registrar of companies along with a copy of a memorandum of association and other documents that are required for the incorporation of the company.
The memorandum must contain the name of the company, address of the registered office, its objects and the purpose and at last the liability of the members. Subscribers of the memorandum should also be included.
Apart from this, the Companies Act has also prescribed certain other compliances, such as requirements relating to names of private companies, their Articles of Association, details of members, transferability of shares, etc.
Privileges of Private Companies
There are certain privileges and exemptions for private companies but public companies cannot enjoy these privileges. These privileges provide some freedom to the private company which helps in conducting their affairs.
Some of the privileges are as follows:
- 2 minimum directors required.
- No independent directors are needed.
- They don’t have to prepare report on annual general meeting.
- Can give higher remuneration to directors as compared to other types of companies.
- Can adopt some additional grounds for vacating and disqualification of directors.
Limitations of Private Companies
Despite many advantages or privileges, there are some limitations also:
- Cannot freely transfer the shares.
- Shareholders have great risk and liabilities.
- External financial support is difficult for them.
How to register for a Private Limited Company
The private limited company can be incorporated through a form Spice+ which is introduced by MCA. This form offers 10 different services through a single web page.
Documents required for incorporation of a private limited company
- Identity proof of Directors;
- Proof of Address of Directors;
- Proof of Address of registered office of the company;
- Director Identification Number (DIN) of all the directors, if already taken;
- Memorandum of Association (MOA)
- Articles of association (AOA)
Procure Digital Signature Certificate
The foremost step is to obtain the DSCs of the personnel involved in Private Company Incorporation India. The need for DSSCs rises for filling of e-forms on the online portal of MCA as the Ministry has prescribed provided for the online registration procedure for company incorporation. The DSC or Digital Signature Certificate is valid for 1 or 2 years.
Obtain Director Identification Number
Director Identification Number (DIN) is a unique number given to directors by the ministry of Corporate Affairs. The number is allotted for the lifetime by the ministry unless it is withdrawn or surrendered. The Director Identification Number obtained can also be used for an appointment for any other company and appointment as Designated Partner in the LLP.
Reservation of Name
The name of the company will be reserved before filing for the incorporation of the private limited company. For reservation of company name, a form has to be filled which is e-form INC-1 by making a particular payment.
There are some provisions laid down by the act for approval of the name of a private limited company. These are as follows:
- The name should be easy to spell and remember;
- The name shall be able to provide a distinct identity to the company;
- It should be short & simple;
- The name should not contain any word as opposed to public policy or prohibited;
- It should not infringe any Trademark registered nor shall be similar or identical to any company/ LLP registered.
In total 6 names can be given by the company from which anyone name will be approved by the registrar.
Certificate of Incorporation
After reserving the name for the company then the application for issuance of a certificate of incorporation has to be given. The company also be registered online through online submission of Simplified Performa for Incorporating Company Electronically i.e. SPICe forms.
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After receiving the certificate of incorporation the private limited company is legal in the eyes of law. The directors can now start the working and different activities in the company.
Difference between Private Company and Public Company
Common differences between a private company and a public company:
|Features||Private Limited Company||Public Limited Company|
|Invitation to private||NO||YES|
|Issue of Prospectus||NO||YES|
|Managerial remuneration||Not more than 11% of net profit||No restriction|
Although the private limited company is one of the best types of companies for small and medium-sized businesses that are family-owned or professionally managed, one cannot take it lightly. From the business point of view, time and effort are needed and as well significant knowledge of business and a financially sound person is also required. In addition to the above, with respect to regulatory compliance, one has to ensure, the stricter adherence of the Companies Act 2013 read with relevant rules since non-compliance would attract severe penalties.
The registration of Pvt Ltd Company in India can be processed with ease by consultation of Practicing Professional. Further, after online ltd company incorporation, the promoters and directors are required to maintain the active status of the company by compliance with the provisions of the company by filing the annual returns and forms as prescribed by the Indian Companies Act, 2013.
Written By- Roopica Sharma