What is a Private Limited Company?

The author in this article discusses the concept of Private company alongwith its requirements and formalities. It further discusses the various legal provisions talking about Private company.
Estimated Reading Time: 6 minutes

A private limited company is usually a business entity owned by a small number of people with pre-defined objectives. The people who own the shares are known as shareholders of the company. A private company is defined under company law. The liability of the shareholders is limited to the shares they hold in the company.

Section 2(68)[1] of the Act defines the private company as- A Company which has 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;

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

Characteristics of the Private Company

Members- As per the Companies Act, 2013, to start a private company minimum of 2 members andamaximum of 200 members are allowed.

Limited Liability- The shareholders have limited liability. Their liability is directly proportional to the shares they hold in the company. It means when a company is at risk or at a loss, the shareholders are required to sell their assets, but their individual and personal shares are not at risk.

Perpetual Succession-A company is a separate legal entity in the eyes of law. So, a company never dies. Even if all the partners of the company die or become bankrupt, then also the company remains the same in the eyes oflaw. The company is independent of its members, thelife doesn’t depend on them.

Index of Members- Private company,doesn’thave to keep the index of the members like that of the public company.

Number of Directors- As per Companies Law is concerned, minimum 2 directors are required to start a company.

Paid Up Capital- According to the act, it must have a minimum paid-up capital of rupees 1 lakh or higher such amount fromtime to time.

Prospectus- It is a detailed statement of the company’s affairs that has to be issued in public. It is required to be released in case of a public company, but in thecase of the private company, the prospectus is not necessary as a private company cannot invite the public to subscribe shares in their company.

Minimum Subscription- It is the amount received by the company, which is 90% of shares subscribed within a reasonable period. If the minimum subscription criteria are not met, then the company cannot further do their business. But in the case of the private company, these criteria are not required. Shares can be allotted to the public without receiving the minimum subscription.

Name- The private company must use the suffix privately limited after its name. (Pvt. Ltd.)

 Requirements for Private Limited Company Registration

Members- Minimum 2 members and amaximum of 200 members are required under company law before registration of the company.

Directors- Minimum 2 directors are required to start a company and to get the company registered. Each director should have the director identification number i.e. DIN which is issued by the ministry of corporate affairs. One more condition that is required that one of the directors should be a citizen of India, or he/she should have stayed 182 days in India in the previous year.

Name- This is one of the important aspects before forming a company. The name of the company consists of three parts- name, the activity of the company, and third private limited. The company name should always have private limited after its name. The of the company should be unique and expressive, and it should not be similar to the other registered companies. The directors of the companies should provide 5-6 names to the registrar so that the chances of getting their choice name increases. Before submitting a name, they should think carefully as the name of the company will remain throughout its life.

Registered Office Address- While going for registration of the company the directors can provide for the temporary address, but after the registration of the company, the company has to provide the permanent registered office address to the registrar. Registered of the company means where the company’s all the main affairs and work is conducted and where all the important documents are placed.

Obtaining a Digital Signature Certificate-Where everything is shifting to online mode, all the documents for the registration of the company have to be submitted electronically and every company has to obtain a digital certificate to check the authenticity of the documents provided.

Advantages of Private Limited Companies

Ownership- In a private limited company, there is ownership by a few people only. In a private company, the regulations and shares of the company are given to another person only by the owner’s choice, not like a public company where shares and regulation of the company can be given to anyone in public.

Minimum Number of Shareholders- In a private company, only twopersons are required to start a company, not like that of a public company where sevenpeople are minimum required to start the company.

Legal Formalities-There is a long list of formalities when you plan to start a public company. The private company list, in comparison to a public company, is shorter.

Disclosing Information- In a public company, they have to disclose all the financial reports of the company to the public after every reasonable period, but in a private company there is no such compulsion regarding that.

Management and Decision Making- In public companies, it is difficult to manage as there is a lot of many people and it is difficult to get a consensus on any decision as they have to consult to so many shareholders, but in the private company there is more strong management and decision making due to less number of people.

The focus of Management- The main aim of the public company is to focus on increasing the shares of the company. But in the private company, they have a focus on both long- and short-term business goals.

Stock Market Pressure- In a private company, the members or shareholders are not pressurized by the stock market as neither has to improve the stocks of the company nor are expected to do so. But in a public company, they are more focused on current earnings and to increase the share capital of the company to increase the earnings of the company.

Long Term Planning- As stated above the members of the public companies are more focused on a short term plan to increase current earnings and share capital but the private companies are more focused on long term earning and planning.

Minimum Share Capital- In a public company you are required to have minimum 5 lakhs rupees as a minimum share paid-up capital but in the private company there is a minimum requirement of Rs 1 lakh as a paid-up capital earlier but now there is no such compulsion to have any minimum paid-up shares.

Confidentiality – Confidentiality of the information and documents is essentialto be different from others as if it is disclosed, then the competitors can use it in their favour. In a private company, it is easy to have confidentiality due to a smaller number of people. Still, in the public company, the information is highly at risk of getting disclosed.

Therefore a private limited company is less complicated, less expensive, and less time consuming as compared to the public company.Examples of a private limited company are- Flipkart, Ola, Snapdeal etc.

Also read Difference Between a Limited Company and a Private Limited Company


[1] https://www.legalwiz.in/blog/what-is-a-private-limited-company-in-india

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