Private Companies in India: An overview

This article critically discusses the features and working of private companies in the country. It also distinguishes public companies and private companies. The article also focusses on the benefits and limitations of a private company along with the procedure of registration of a private limited company which is in compliance with Act. The article also discusses a variety of advantages and disadvantages of incorporating a private limited company.
Estimated Reading Time: 10 minutes

Introduction

This article critically discusses the features and working of private companies in the country. It also distinguishes public companies and private companies. The article also focusses on the benefits and limitations of a private company along with the procedure of registration of a private limited company which is in compliance with Companies Act, 2013 (hereinafter referred as “the Act”). The article also discusses in detail the basic features and categories of private limited companies.

According to Section 2(20) of the Act, a company is the one which is registered under the Act or any other previous company laws. Since the definition of the company is not exhaustive so it is necessary to comprehend the meaning bestowed by the scholars over the years. A company as described by various scholars is an association of persons engaged in a business who have a common seal and a separate legal entity. A company can be limited by shares, by guarantee or it can have unlimited liability.A company has a separate legal entity with those of its members and has perpetual existence. The existence of a company does not cease to exist even after the death of its directors. A company can sue and can be sued by other parties which may or may not be involved in the business of the company. The properties of the company are also separate from those of its members. The members cannot attain the property or cannot claim the property or other assets of the company.  The companies in India are divided into various categories. The two major types are private limited companies and public limited companies. Private limited companies differ from a public limited company in many ways. This article focuses on the discussion on aspects of working, features and compliances of the private limited companies.

Meaning of Private Limited Company

Private Limited companies are defined under Section 2(68) of Act which describes it as “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 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;”.

The perusal of the above-mentioned definition elucidates that a private limited company is the one which shall have a paid-up share capital. Earlier the minimum paid capital has to be Rs. 1 lakh but this has been amended now and the amount of paid-up share capital has no minimum requirement now. Further, the definition prohibits the right to transfer shares of a company thereby restricting the public to subscribe to the shares of the company. This also constitutes the major point of differentiation between public limited companies and private limited companies. The definition also decides the limit the number of members to 200 members except in the case of One Person Company (hereinafter referred as OPC). For limitation on the number of memberships, it is pointed out here that the persons holding shares jointly shall be considered as one member. The concept of OPC has been introduced through the Act which has enabled for sole proprietors to carry on their business and attain the status of a private company under the laws regulating the business and corporate industry in the country. Generally, private limited companies are held and incorporated to carry on small scale businesses. The liability of members under private limited companies is generally limited to the number of shares held by them.

Features of Private Limited Company

A private limited company is distinct from other categories of companies existing in the corporate world. Some of the basic features in pursuance to the Act are as follows:

  1. Members: A private limited company can have a minimum of two members and maximum 200 members in the company.
  2. Limited Liability: The members of a private limited company are only liable to the extent of the amount of the shares held by them. The personal assets of the members of private limited companies are not under stake in case the company faces losses.
  3. Directorship: A private limited company can come into existence if there are two directors and there is no limit to the maximum number of directors in private limited companies.
  4. Prospectus not required: A prospectus is needed to determine the company’s growth before the public so that the public subscribe to the shares of companies. But in a private limited company since there is no public subscription hence there is no need for a prospectus.
  5. All the private limited companies in India must use the term private limited after the name of the company as it depicts the status of the company as private.

Types of Private Limited Companies

A private limited company can be of three types, which are mentioned hereinafter:

  1. A company limited by shares: Under this category the members of the private limited company are liable only to the extent of the shares held by them. Generally, such situations come into play when the company faces any kind of losses or during the time of winding up.
  2. A company limited by guarantee: When the company is limited by guarantee then the partners or members of the company are only bound to pay the amount they have guaranteed to the company.
  3. Unlimited liability: A company which has unlimited liability clause shall prescribe its members to have liability which cannot be determined. The personal assets of the members can also be utilized to make good the loss.

Requirements for Registration of Private Limited Companies

To get registered under the Act, there are certain requirements which are needed to be fulfilled. Such requirements are as follows:

  1. The company shall comply with the limit of minimum and the maximum number of members prescribed under the Act.
  2. The company shall also comply with the number of directors prescribed by the Act. All the directors shall have Director Identification Number (hereinafter referred as DIN) which is issued by the Ministry of Corporate Affairs (hereinafter referred as MCA). One of the directors shall be a resident of India which means that the particular director must be staying in India for at least 182 days in the previous calendar year.
  3. After this, the name of the company shall also be sent to the registrar of companies. The company shall send at least five or six names for approval and all these names shall be expressive and unique. It shall be kept in mind that the names are not similar to the names of the already existing companies. The name shall be in three parts. It shall consist of name, the activity done by the company and the term “private limited” which is necessary after the company’s name in case of a private limited company.
  4. The company shall also provide the address of its registered office. As the company has been not registered the owner shall still be liable to send the temporary address of the office of the company. When the company gets registered, the provided temporary address becomes the registered address. All the documents of the company shall be kept at the registered office address and all the main affairs of the company shall be conducted at the registered office address.
  5. With the changing times and evolution of technology, all the transactions are generally conducted digitally. Therefore, the companies shall obtain a digital signature certificate which shall be used for the determination of authenticity of the documents provided by the company. A digital signature of the directors shall also be obtained so that it can be marked on all the documents by all the directors of the company seeking registration.
  6. At the time of incorporation of a company, the company requires certificates from various professionals such as chartered accountants, company secretaries, cost accountants etc.

Advantages of a Private Limited Company

The advantages of incorporating a private limited company are as follows:

  1. A company has the benefit of having a corporate personality. It has its own name, it works under that name, has a legal existence and a common seal. The company can also enter into contracts under its name and can hold bank accounts with its name.
  2. The company has the benefit of being sued or to sue any other party which may or may not be involved in any kind of transaction with the private limited company. The members of the company are not held liable in a court of law for the acts of the company or acts undertaken on behalf of the company.
  3. A company is also an artificial person as the company has a certain existence and it holds property in its name. The private limited companies are also subject to certain rights and duties envisaged under the Act. It is an artificial person as a company is intangible, invisible and thus, it cannot be considered as a natural person in the eyes of law.
  4. A private limited company has no obligations regarding disclosure of its annual reports and other documents to the public.

Limitation of a Private Limited Company

A private limited company also has certain limitations. Some of them are as follows:

  1. The private limited companies cannot transfer the company’s shares easily or to the public and this becomes a major reason for the company’s stagnant growth.
  2. Since the abovementioned reason, the companies also face problems in raising and increasing financial aids and assistance from external sources of the company.
  3. The shareholders of a private limited company have greater risk and responsibility as they are the only ones to aid  the company financially and in all the other ways possible and therefore during the time of losses the shareholders are majorly in risk.

Compliances of a Private Limited Company

The compliances which shall be compulsorily followed by all the private limited companies are as follows:

  1. Compliance to the Object Clause: Before the introduction of the Act a company can undertake the transactions which were beyond the object clause by simply passing a resolution to that effect. But this has changed now, all the private companies shall comply with the object clause mentioned in their Memorandum of Association and any act or transactions failing to comply with the same shall be considered as an ultra vires act.
  2. Company Identification Number: The Act prescribes that all the private limited companies shall have Corporate Identification Number (hereinafter referred as CIN) which shall be mentioned on its letterheads, business letters and all such other documents.
  3. The Act has made it mandatory that the company shall pass a special resolution and the members shall decide upon the issue of taking a debt, the amount of which is more than the paid-up share capital of the company.

Difference Between a private company and a public company

The differences between a private limited company and a public company are as follows –

  1. The members of a public company have a minimum requirement of seven members and there is no limitation on the maximum number of members whereas in the case of private limited companies the minimum number of members shall be 2 and the maximum number shall be 200.
  2. A public company requires at least three directors for the purpose of incorporation and they should stay in India for at least 182 days in the previous calendar year and the maximum number of directors shall be restricted to 15 whereas in the case of private limited companies the minimum number of directors shall be limited to two and maximum number shall be 15.
  3. The quorum for conducting Annual General Meeting (hereinafter referred as AGM) requires more members in public limited companies. In a private limited company, an AGM can be conducted with two members also.
  4. Shares of a public company are listed and are easily transferable. A public limited company can issue shares publicly whereas a private limited company cannot do so. The transferability is restricted in private companies.
  5. Generally, the financial affairs of the public companies are disclosed to the general public whereas the financials of a private limited company are kept confidential.
  6. A public company is under strict compliances and all the financials of the company are to be disclosed to the public whereas there are many exemptions available to a private limited company.
  7. The control over the affairs of the company and the management of a public limited company rests with the majority shareholders and with board of directors which are generally outsiders whereas in a private limited company the management and control over the affairs of the company lies with the Board and shareholders who are closely related or known to the company.

Conclusion

This article majorly focused on the aspects of working of a private limited company. The article has covered a variety of advantages and disadvantages of incorporating a private limited company. It is pointed out that accountability and disclosure should be made stringent in private companies to maintain transparency in the business. The distinction of private and public limited companies also depicts that the private companies are at ease and the working is smooth because of fewer compliances and non-complicated procedures. The only problem faced by a private limited company is its difficulty in getting financial assistance which public limited companies get easily through public shareholding.

Read about A Guide to One Person Company under the Indian Company Law

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