How many members are required to form a Limited Company?

The author in this article discusses the requirement of number of members to form a Limited company and the related provisions. Author further differentiate between different types of companies based on its number of members, size, capital, etc. with the help of relevant case laws and the corollary of latest amendments on its provisions.
Estimated Reading Time: 16 minutes

History of Companies Act, 2013

According to data by the Ministry of Corporate Affairs, there are whopping 11,89,826 active companies in India as of June 2018[1]. These companies are governed by one uniform statute, The Companies Act, 2013. The 2013 Act repealed the 1956 Act as the old Act was unable to meet the demands of the sprouting Indian economy. There was clamour amongst several investors and stakeholders for a revised comprehensive statutory framework. Let us discuss the provisions to form a Limited Company.

The 2013 Act strives to fill in the lacunae, despite fewer sections, the act empowers companies, by ensuring the ease of doing business and high value for corporate governance. Moreover, it also introduced a new form of Company. In this article, I’ll differentiate between different types of companies based on its number of members, size, capital, etc. with the help of relevant case laws and the corollary of latest amendments on its provisions.

Types of Companies

Section 2(68) of the 2013 Act defines Private Company. The section is similar to the erstwhile Section 3(1)(iii) of the 1956 Act.

2(68) “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,

(i) restricts the right to transfer its shares;

(ii) except in the case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the Company; and

(B) persons who, having been formerly in the employment of the Company, were members of the Company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the Company;

An entity which falls under this definition has limited liability which restricts shareholders from publicly trading shares and prevents public at large from subscribing to them. Ergo, private companies enjoy a number of exemptions from the operation of the act. These exemptions are commonly known as privileges or advantages of a private company. It is by virtue of these exemptions that a private company has been described “as an incorporated partnership, combining the advantage of both elements, the privacy of partnership and the permanence of the corporate constitution … Ordinary companies are like bees working in glass hives. Private companies can keep their affairs to themselves.”[2]

Salient features of a Private Company

Number of Members:As per the 1956 Act, the ceiling was fixed at 50. Presently, a minimum of 2 members is de rigueur with a maximum of 200 members. This excludes those who are in employment or were in the employment of the company. 

Section 450 of the Act provides that if the number of members falls below 2, (a time period of six months has been provided for redressal) the company along with its officers who are at default shall be liable to be punished with fine.

Number of Directors: A Private Company needs to have only 2 Directors to incorporate a company, out of which 1 Director has to be a resident of India.

Number of Shareholders: A minimum of 2 shareholders are required, they might either be natural persons or companies, with maximum number of shareholders being 200.

Paid-up capital:Earlier, it was mandatory for a company to have a minimum paid-upcapital of ₹1 Lakh. However, this has been omitted by the Companies (Amendment) Act, 2015 and now the requirement is relaxed as only stamp duty has to be paid for incorporating a company.

Prospectus: There is no need to issue a prospectus for a private company since it does not invite the public to subscribe for shares of the Company.

Limited Liability: The liability of each shareholder is limited, which telltales that the individual assets of the shareholder are not at risk if the Company faces any loss. The concept of independent corporate existence was recognised in the case of Salomon V. Salomon[3], the court held that a company has its own personality distinct from its members, thence, a shareholder can’t be held liable for the acts of the Company even though he effectually holds the entire share capital. In LIC V. Escorts Ltd. & Ors.[4], the Supreme Court held that once a company has been incorporated, it has an independent legal personality distinct from its members. The Supreme Court in Vodafone International Holdings BV V. Union of India[5]held that corporate bodies could not be excommunicated because they exist only in abstract.

Index of Members: There is no need to keep an index of members like a public company.

Name: Mandatory for all private companies to use ‘Pvt. Ltd.’ after its name.

Common Seal: Earlier, the company’s common seal was required to be affixed on all its documents. After the Companies (Amendment) Act, 2015, the common seal has been made optional.

Minimum Subscription: The amount received by the Company on the shares to be issued within a fixed period of time. A company is not permitted to commence business if it is unable to receive such amount. In a private company, shares can be allotted without receiving the amount of minimum subscription since it is mandatory to be stated in the Prospectus which is not germane in case of private companies.

Perpetual Succession: The Company keeps on existing in the eyes of law, even after the demise of a member or bankruptcy of a member. The Company goes on to exist till wound up. Members may come and go, but the Company can go for ever. Therefore, death or insolvency of members does not affect the continued existence of the Company.[6]

Restriction on transferability of shares: A Private Company must ensure that no invitation goes out to the public to subscribe to its securities. Nonetheless, a Private Company may opt for issue of shares on private placement basis in compliance with Section 42. This means that there can be no public advertisement of shares and securities cannot be offered to more than 200 persons. Howbeit, if a Private Company decides to offer its securities to more than 200 persons. It becomes a deemed public offer. [7]

Lifting of Corporate Veil

It sometimes becomes necessary to pierce the corporate veil to reveal the identity of members. The separate entity of the Company is overlooked and the scheme and animus of the persons behind are disclosed to full view. The shareholders or members are made personally liable for using the Company as a vehicle for undesirable purposes.[8] Both Courts and Legislature have allowed the veil to be lifted to disregard the corporate entity and pay regard to the members behind the legal farce. It is usually done in the following situations:

  1. To determine the legal character of a corporation, whether the enemy country is in de facto control of  its affairs[9] or is guilty of sham and collusive transactions.[10]
  2. When a company has been formed to evade taxes[11] or has been conceived for fraudulent purposes.[12]
  3. Where a Government company is performing commercial functions as opposed to sovereign functions[13] or under statutory provisions, for e.g. under Section 464 where a business is carried on beyond six months after the knowledge that the membership of the Company has gone below the statutory minimum

In New Horizons Ltd. V. Union of India[14], The Court observed that the corporate veil may be lifted and the independence of the corporate entity can be snubbed aside in cases where the scheme of corporate personality is blatantly opposed to justice, convenience, or in the interest of revenue.

Types of Private Limited Company

  1. Company limited by shares: Section 2(22) of the Act allows a Company through its MoA (Memorandum of Association) to limit the liability of its Members to the amount, if any, unpaid on the shares respectively held by them.
  2. Company limited by guarantee:Section 2(21) of the Act allows a Company through its MoA to limit the liability of its Members to the amount they’ve respectively agreed to contribute to the assets of the company in case it is being wound up.
  3. Unlimited Company:Section 2(92) allows a Company to not have any limit on the liability of its members. This means that members are solely accountable for debts and liabilities of the company.

Procedure to form a Private Company

Choose name of intended Company à Apply for DIN and Digital Signatures à Draft MoA and AoA à E-filing of digitally signed documents with the ROC à Pay required fee àObtainCertificate of Incorporation

Effect of recent amendments on Private Companies

Companies (Amendment) Act, 2015: The requirement for having a minimum paid-up capital of ₹1 Lakh for Private Limited Companies has been omitted. This ensured ease of doing business, access to start-ups, and lower registration costs. The mandatory requirement of a common seal on documents has now been made optional.

Companies (Amendment) Act, 2017: Insertion of Clause 3A provides for liability of payment of debts by all the existing members if the minimum number of members falls below the statutory limit for a period of six months or more.

The amendment requires a resident director to stay in India for at least 182 days in the current financial year as opposed to 182 days during the previous calendar year. This brings about flexibility for non-resident directors.

Companies (Amendment) Act, 2019: Introduced Section 10A which requires a Company to declare its share capital with the ROC (Registrar of Companies) before it commences its business or exercises borrowing poser.

It amended Section 12 which empowers ROC to cause physical verification of the registered office of a Company, if he has reasonable belief that the operations are being carried out in violation of Section 10A of the act. Furthermore, it is empowered to initiate action for removal of name of the defaulting company from the Register of Companies.

Characteristics of a Public Limited Company

A Public Limited Company mostly has the characteristics of a Private Limited Company. It has all the advantages of Private Limited Company and the capability to have any number of members, ease in transfer of shareholding and more pellucidity.

Public Limited Company usually offers securities to the public by way of stocks, bonds or loans customarily available on a stock exchange. These offerings help raise capital for the Company. A public company which is listed on any stock exchange can sell its shares to investors who forecast a return on their investment, this return purely depends on market factors and performance of the Company.

Two main components of a Public Limited Company is that they are limited by shares and have limited liability. This means that the shares of a public limited company can be bought and sold freely in the market. Whereas, limited liability ensures that in the event of bankruptcy of Company or its inability to perform, the financial burden of shareholders is limited to the face value of the shares owned.

Section 2(71) of the 2013 Act defines Public Company.

2(71) “public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public Company for the purposes of this act even where such subsidiary company continues to be a private company in its articles;

Number of Members: A minimum number of 7 members are required and there is no cap on maximum number of members.

Number of Directors: A public company needs to have 3 directors with one resident director in order to incorporate a company in India, with a maximum of 15 directors.

Paid-up Capital: Earlier a Public company required a paid-up capital of ₹5 lakh or higher. However, after the Companies (Amendment) Act, 2015 amendment, it has been omitted.

Prospectus: Only a public company is entitled to issue a prospectus and invite applications for its shares and debentures. ‘Issued’ means issued to the public[15]. ‘Public’ includes any sections of the public, whether selected as members or debenture-holders of a Company concerned or as clients of the person issuing prospectus.[16] Furthermore, only Public Companies are allowed to issue securities in dematerialised form.

Index: A Public Company is required to maintain an index of its members as per that statute.

Name: A Public Liability Company must use the word ‘Ltd.’ After its name.

Independent Directors and retirement of Directors: A Public Company has to appoint an Independent Director unlike a Private Company, where it is not compulsory. At least 2/3 of the Directors of a Public Company must be such whose office is conditional to retirement on rotation.

Advantages: Besides limited liability and free transfer of shares a Public Limited Company can raise capital by offering securities such as debt or equity, this ensures scope of higher growth and financial strength. Furthermore, initial public offerings help them meet their fiscal requirements. Since, many investors own small portions of the Company through the stock market, there are fewer chances of insolvency. Moreover, there are able to grasp more press and public relations through media and listing on the stock market.

Disadvantages: In addition to being open to scrutiny as anyone can access the account books and records, going public is a costly affair. A Public Company has to be wary of greedy shareholders and hostile investors, they usually buy shares in bulk and exercise considerable leverage in board meetings and decisions. Furthermore, you end up losing substantial control over the Company. Moreover, minority shareholders often feel ousted from major decisions of the board. The legal and regulatory framework creates extra paperwork and burden, for e.g., a company has to be audited by an external auditor to determine its financial health.

As per a report by KPMG here has been a decline of 56% year or year decline in IPOs in the last three years. This has been despite SEBI making it easier for companies to list.[17] Most aspiring Companies or start-ups are avoiding the compliance issues and paperwork. Rather, they are relying more on the sturdy and potent angel investor community.[18] Going public, although lucrative if knowledgeable is more suitable to large corporates who can take the risk.

When Private Company becomes a Public Limited Company (Section 14)

14(1) Subject to the provisions of this act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of—

(a) a private company into a public company; or

(b) a public company into a private company:

Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this act, the Company shall, as from the date of such alteration, cease to be a private company:

Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.

(2) Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same.

(3) Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this act, be valid as if it were originally in the articles.

  1. Conversion by default: When a default is made in complying with requirements of the definition, the Company ceases to be entitles to the privileges and exemptions conferred by the statute.
  2. Conversion by choice: By passing a special resolution deleting from its articles the requirements of definition and then from the date of alteration, it becomes a Public Company. A private company becomes a public company immediately after the resolution for conversion is passed.[19]

One Person Company

Propogated by the JJ Irani Committee[20] in 2005, this was a new provision introduced by the 2013 Act. This was a game-changer as it realised a new way of doing business. Besides, it accorded flexibility and the convenience of a Private Company. One Person Company is defined under Section 2(62) of the Act. It refers to a company which has only one person as a member. Hence, it only has one shareholder. Section 3 of the Act provides for the formation of a One Person Company. It states that a One Person Company is a Private Company. This ensures that there is a restriction on transfer of shares and prohibition on an invitation to the public to subscribe for securities of the company. This was a welcoming step as it enabled young entrepreneurs with tremendous potential to dip their toes in the waters of business.

Only a natural Indian citizen and resident can form a One Person Company. According to Section 12, the name of the One Person Company shall legibly affix, print, or engrave that it is One Person Company. Moreover, the MoA shall indicate the name of another person who shall in the event of the founder’s demise or his incapacity to contract, become the member of the Company. However, prior written consent shall be taken before doing so. The written consent has to be deposited with the RoC at the time of incorporation. However, the person has imprimatur to withdraw his consent or the subscriber has authority to change the name of the nominee. It too like a Private Company has no criteria for a minimum paid-up share capital.

As per Section 96, it is not binding for a One Person Company to hold an Annual General Meeting. Rather, in conformity to Section 122, any resolution communicated by the sole member of the Company; entered in the minute-book and signed and dated shall be the date of such meeting.

Advantages:

  1. It grants complete control and power to supervise to the sole member.
  2. They offer lesser compliance burden as compared to Private Companies.
  3. The Director and the shareholder can be the same person. This enables micro-enterprises to form companies and enter the corporate domain, ensuring legal status for their business.
  4. It offers limited liability to the amount of unpaid subscription money.
  5. Taxed in the same bracket (30%) as a Private Company as compared to a sole proprietorship.

Disadvantages:

  1. It cannot be formed to carry out non-banking financial activities.
  2. It cannot be converted into a company for charitable objects as per Section 8.
  3. NRI’s or foreign nationals cannot form a One Person Company. Moreover, a minor cannot be the subscriber or nominee of a One Person Company.
  4. The concept of perpetual succession has been challenged as upon the demise of the subscriber’s death, the nominee won’t be well-versed with the functions and operations of the business.
  5. Only apt for paltry businesses or shops.

Conversion of One Person Company into a Private Company or Public Limited Company:

  1. Conversion by default: When the paid-up share capital of the company exceeds ₹50 lakhs or its average turnover exceeds two crores, it ceases to be a One Person Company. Upon default, the Company has six months to convert itself either into a Private or Public Company.
  2. Voluntary Conversion: It can convert itself into either a Private or Public Company by increasing the numbers of members and directors and complying with provisions of Section 18.

Rule 3(2) of the Amended Incorporation Rules, 2016 provides that a natural person shall not be a member of more than (1) One Person Company at any point of time and the said person shall not be a nominee of more than (1) One Person Company.

Analysis

The 2013 Act and subsequent amendments have brought abought significant changes in the corporate world. The Act has, shared a rocky journey with major amendments in a span of seven years. Albeit, the law is dynamic, and every policy framework needs to evolve to deal with growing challenges, but the act has been impaired with incertitude that could have been avoided with clearer drafting and foresight from the outset.[21] Notwithstanding the introduction of One Person Company and the removal of the requirement of minimum paid-up share capital has appreciated the growing economy of India and given a chance to young entrepreneurs to contribute skilfully. It proved itself to be a promising concept.

India currently ranks at the 63rd position out of 193 countries in ease of doing business.[22] However, with the constant amendments, investors are finding it laborious to keep up with the changing reforms. The Company (Amendment) Bill 2020, based on Company Law Committee, set up in September 2019, was recently passed by the Lok Sabha. The Bill seeks to decriminalise minor procedural miscues and provide for ease of doing business. It’d be interesting to see whether the amendment offers a breather to companies to conduct business in India.

Also read What is a Private Limited Company?


[1] Only 66% of registered companies in India are active: Govt data, LIVEMINT, (Accessed on 07/02/2020), https://www.livemint.com/Companies/S7Ri5aQEAMIaiikRpMYRNI/Only-66-of-registered-companies-in-India-are-active-Govt-d.html

[2] 12th Edn. AVTAR SINGH, INTRODUCTION TO COMPANY LAW, page 213, (2006)

[3] Salomon V. Salomon & Co Ltd, 1897 Ac 22 (HL)

[4]  LIC V. Escorts Ltd & Ors (1986) 1 SCC 264

[5] Vodafone International Holdings BV V. Union of India, (2012) 6 SCC 613

[6] L.C.B Gower, Modern Company Law (2nd Edn. 1957) 71

[7]Sahara India Real Estate Corporation Ltd vSEBI (2012) 10 SCC 603

[8] Jai Narain Parasrampuria V. Pushpa Devi Saraf, (2006) 7 SCC 756

[9] Daimler Co Ltd V. Continental Tyre & Rubber Co (Great Britain) Ltd (1916) 2 AC 207 (HL)

[10] CIT V. Sri Meenakshi Mills Ltd, AIR 1967 SC 819

[11] Parle Bisleri (P) Ltd V Commissioner of Customs and Central Excise, (2010) 14 SCC 378

[12] Gilford Motor Co Ltd V. Horne, 1933 Ch 935 (CA)

[13] Praga Tools Corporation V. CA Imanual, (1969) 1 SCC 585

[14] New Horizons Ltd. V. Union of India (1995) 1 SCC 478

[15] Nash V. Lynde (1929) AC 158 HL

[16] South of England Natural gas and Petroleum Co Ltd, re, (1911) 1 Ch 573

[17] Ananya Bhattacharya, Charted: IPO’s in India are becoming fewer, smaller and less lucrative, QUARTZ INDIA (Accessed on 07/02/2020) https://qz.com/india/1747014/ipos-on-indias-bse-nse-are-becoming-fewer-and-less-lucrative/

[18] Ananya Bhattacharya, Good news for young startups as India eases scrutiny on angel investment, QUARTZ INDIA (Accessed on 07/02/2020) https://qz.com/india/1659222/indias-union-budget-offers-some-relief-on-the-angel-tax-issue/

[19] Ram Parshottam Mittal V. Hillcrest Reality Sdn Bhd (2009) SCC 709

[20]Ministry of Corporate Affairs, May 2005, Report of the Expert Committed on COMPANY LAW

[21]Phoenix Legal, Companies Act, 2013: Time to Reboot?, MONDAQ, (Accessed on 07/02/2020)https://www.mondaq.com/india/shareholders/890282/companies-act-2013-time-to-reboot

[22] Asit Ranjan Mishra, India’s rank jumps 14 places in World Bank’s ease of doing business ranking, LIVEMINT, (Accessed on 07/02/2020) https://www.livemint.com/news/india/india-jumps-14-notches-in-world-bank-s-ease-of-doing-business-rankings-11571882591868.html

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