Published On: Dec 19, 2018 • Last Updated: Feb 23, 2019 • 5.4 min read •
A Private Limited Company is a business entity held by small group of people. It is registered for pre-defined objects and owned by a group of members called shareholders. Startups and businesses with higher growth aspiration popularly choose Private Company as suitable business structure.
The business entity gets recognised as a Company through its registration under Companies Act of 2013 in India. The governing body is Ministry of Corporate Affairs, widely known as MCA. The definition of Private Company under the Act is provided here to understand its basics. Section 2 (68) of the Act defines a Private Company as under:
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 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
From the basic reading, we understand that a Private Company’s share transfer is restricted with some of the conditions. Further, if its members exceed 200, it stops to be a Private Company. It further inherits the prohibition to invite the public at large to subscribe any securities. In absence of any of these conditions, the company loses its identity as a Private Company.
To understand the structure rightly, I would like to brief these features of Private Limited Company here.
Ownership defined by Share Capital:
The shareholders are the real owners of the company. The ownership in a Private Limited Company is defined by share capital. Shares are the equal parts of the company’s capital. The ratio of ownership is defined by shares held by the owners in the company.
Such kind of arrangement in shareholding is one of the reasons for investor to be attracted towards company form of businesses. The equity ownership is convenient option for them to pursue ownership in a business. Further, the shares can also be issued at premium to introduce more capital, which eases the investment process.
Ownership in form of shares is easily transferable, compared capital of other structure like LLP. However, it is subject to restriction as mentioned in the definition above. If a shareholder is seeking exit from the company, he is first required to offer the shares to an existing member and then to a third party. Further, the proposed transfer is required to be approved by the Board Members for the good of company. This kind of restriction is put to retain the private ownership of the company. Moreover, the shareholders cannot trade shares publically or on the stock exchanged like a listed company.
Number of Members:
Shareholders of a company are also known as members. To register a Private Limited Company in India, minimum two members are required. Here, an individual or even a body corporate can become a member of the company. There is a ceiling limit to the number of members in a Private Company. The same is provided as maximum of 200 members. The exception here is One Person Company, where there is only one member.
To calculate the number of member in a private company, following it considered further.
If two or more persons are holding shares jointly, they shall be considered as one shareholder for this purpose.
ESOP is option to issue equities to a person in employment of the company. Such person whether are not included in said calculation. This includes the present and previous employees of the company, who have continued to be members after the employment ceased.
Prohibition to Invite Public to Subscribe Securities:
The Private Companies are prohibited by its definition to invite public for subscription of securities. Public companies can issue prospectus to invite public at large for raising capital. However, this is not allowed in case of Private Company. It is banned to invite subscription from public by issuing such documents.
The other features, also befitting as benefits of Private Limited Company are discussed in series of our blog.s
Why Private Limited Company is preferred by startups?
Private Limited Company is preferred structure by startups because of stability and growth opportunities offered by this structure. Further, it assures separate legal existence from its members. So, it can involve into contracts and legal proceedings in its own name. Moreover, a company’s status is unaffected from any change in members and management.
Separate managerial board i.e. Board of Directors is beneficial for members interested for investment purpose. Where Board works on remuneration, the members receive profit sharing in form of Dividend.
It also offers various funding options in form of private equity, ESOP and more. This makes it more suitable for external funding options. And thus, it is more preferred by VCs, Angel Investors, and other outside funding agencies compared to any other business structures. It also is rather preferred by banks and lending agencies because of the credibility that it holds as a corporate structure.
A private company is eligible to take benefit of registration under Startup India Scheme of Government of India. This scheme avails multiple benefits including tax exemptions for the recognised startups.
Because of these reasons, it is the priority for both family-based businesses and start-ups. Where service-based businesses tend to choose LLP, Pvt Ltd is suitable for productbased and growth-oriented businesses.
There are various types of Private Company, classified based on liability and capital. Here, we are discussing such in brief.
Based on Capital: A Private Company can be registered with or without share capital. The type of company based on capital is provided in the capital clause of the MoA of the company.
Based on Liability: The members’ liability can be limited or unlimited. Usually, companies are registered with Limited Liability in India. In case of companies with shareholding, members’ liability is limited to unpaid capital on subscribed shares. In case of companies without shareholding, the agreed amount of liability in form of capital is provided in MoA of the company.
One Person Company: One Person Company, popularly known as OPC is a type of Private Limited Company. It is a company registered with only one shareholder. This structure benefits such promoter, who does not want to share the ownership rights.
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