Private Limited company

What is a private company?

A private company, often called a private limited company, is owned by a small group or entities. Unlike public companies, it doesn’t sell shares to the public or trade on stock exchanges. This select ownership offers more control and privacy in decision-making and financial matters, making it an appealing option for those prioritizing stability and confidentiality in their business operations.

Characteristics of a company

The following is the objective of a private limited company(characteristics of a company). They are explained below:

1. Company Name

Private limited companies commonly use the term “Private Limited” or the abbreviation “Pvt. Ltd.” as part of their company name. This designation indicates the company’s legal structure and limited liability status. Including “Private Limited” or “Pvt. Ltd.” in the company name is a requirement in many jurisdictions to signify that the company is privately held and its ownership is limited to a select group of shareholders. 

2. Limited Liability

The advantage of a private limited company lies in its limited liability feature, which safeguards the personal assets of its shareholders (owners) from the company’s debts and obligations. Under this structure, the private company is considered a distinct legal entity in the eyes of the law. As a result, the shareholders’ liability is restricted solely to the extent of their investment in the company or any guarantees they may have provided during its incorporation process. This means that the shareholders are not personally responsible for the company’s debts beyond their initial contributions or guarantees. This concept of limited liability encourages investment and entrepreneurial endeavours while protecting the individual shareholders’ wealth.

3. Number of Shareholders

Private Limited companies have a smaller number of shareholders compared to public companies. As per company Law, the minimum number of shareholders required to form a private company is two(2), and the maximum can be limited to a few hundred.

4. Transferability of Shares

In a private limited company, shares can’t be sold to outsiders without approval. Shareholders require consent from fellow shareholders to sell or transfer their shares, ensuring a controlled and close-knit ownership structure.

5. Financial Disclosure

Private limited companies are not mandatory to disclose their financial information, such as annual reports and financial statements, as public limited companies do. The financial information remains confidential among the shareholders and regulatory authorities. 

6. The company is an artificial person

A private limited company, as a legal entity, not a person. People manage it, but it can do things like making deals, owning things, and being involved in legal cases, just like a person.

7. Perpetual Succession

Perpetual succession is a concept that allows a private limited company to continue existing even if its founders, shareholders, or members change or pass away. Easily, it means that the company can go on forever, regardless of who the owners or current members. 

8. Separate property

“Separate property” refers to the distinct legal separation between a private limited company and its owners (shareholders). It means that the private limited company’s assets, liabilities, and legal obligations are separate and distinct from those of its owners.

Type of Private Company

Following are the types of private limited company. They are as explained below

1. Company limited by share

 A company limited by shares is a private company with shareholders whose liability is restricted to the unpaid value of their claims. It operates by dividing its capital into shares, which represent ownership stakes. Shareholders are shielded from personal liability beyond their share contribution.

2. Limited by Guarantee Company

A company limited by guarantee is a special type of private limited company in which “shareholders or owners” provide a certain amount as a guarantee. It helps to protect the members from large debts. It’s commonly used by charities, clubs, and other non-profit groups because it gives them legal protection and allows them to do good things for their communities without worrying too much about financial risks.

3. Unlimited company

An unlimited company is a business structure where the liability of its members extends beyond their investment. If the company faces debts or financial issues, the members can be held personally responsible for all obligations, even beyond the value of their shares. This form of company is less common and carries higher financial risk for its members compared to limited liability companies.

Benefits of a private limited company

Advantages of a private limited company like limited liability, separate legal entity and many more. They are explained below:

1. Limited Liability

The advantage of a private limited company lies in its limited liability feature, which safeguards the personal assets of its shareholders (owners) from the company’s debts and obligations. Under this structure, the private company is considered a distinct legal entity in the eyes of the law. As a result, the shareholders’ liability is restricted solely to the extent of their investment in the company or any guarantees they may have provided during its incorporation process. This means that the shareholders are not personally responsible for the company’s debts beyond their initial contributions or guarantees. This concept of limited liability encourages investment and entrepreneurial endeavours while protecting the individual shareholders’ wealth.

2. Separate legal entity

The best thing about a private limited company is that it’s like its own person. It’s separate from its owners, which means it has its own rights and responsibilities. Even if the people running the company change, it goes on forever. This gives the business stability and lets it operate for a long time. So, when you set up a private limited company, you create a strong and independent entity whose go forever either member may come and go private limited company goes forever. 

3. Ownership

The best advantage of a private limited company is private ownership. Since its shares are not publicly traded, the company enjoys greater privacy and control over who owns it. This means the owners can make decisions without interference from public shareholders, giving them more flexibility to run the business.

4. Tax Benefits

Private limited companies enjoy some great perks when it comes to taxes. These benefits can lead to lower tax payments, which means more money stays in the company’s pocket. It helps boost profits and provides extra funds for the company to use. The government offers these tax advantages to encourage business growth and investments. So, if a private company makes good use of these tax benefits, it can make a big difference in its financial success.

5. Transfer of shares

In a private limited company, sharing ownership with others is a little different than in big public companies. It’s more like a family, where you can choose who joins the family as a shareholder. This gives the company more stability and control, as everyone shares the same vision.

Disadvantages of a private limited company

There are various disadvantages of private limited company like Restrictions on share transfers, Limited resources and many more. They are explained below:

1. Restrictions on share transfers

In private limited companies, transferring shares is difficult, but it is treated as welcoming new members into the company ownership. Unlike big public companies, we have more control over who becomes a shareholder. When someone wants to join a private company, existing shareholders take some time to ensure they’ll be fit as shareholders of our private limited company. Our company’s rules might require approval from existing shareholders or the board before the transfer. 

2. Limited resources

One of the challenging things about private limited companies is that they often need more resources to work with. Private companies have fewer options than big public companies that can easily raise money from the stock market. It can be challenging to get enough funds for big expansions or exciting new projects.

3. Shareholder disputes

Shareholder disputes can sometimes arise in private limited companies. Since there are fewer shareholders, disagreements on company matters like decision-making, profits, or future directions can happen. 

Distinguished between private company and public company

Objective	Private company	Public Company
Ownership	Owned by private individuals	Owned by public
Abbreviation	End with the word PVT. LTD	End by the phrase LTD
Number of Shareholders	The minimum number of shareholders is 2The maximum number of shareholders is 100	Minimum number of shareholders 7The maximum number of shareholders is unlimited
Share Transfer Restrictions	Share transfers may need approval	Shares can be freely bought and sold
Disclosure Requirements	Less strict rules for sharing information	More requirements to disclose financial information
Access to Public Capital	Limited access to public stock markets	Can raise funds from the public through stock sales
Legal Compliance	Less compliance	More compliance
Shareholder Privacy	Shareholders have more privacy	Shareholder details are general information
Company Size	Generally, small and medium company size	Mostly large company
Employee Incentives	Fewer options for employee share ownership	More employee stock options and incentives

When to choose a private limited company?

Before choosing a private company, you have to go through the given factors and then decide. The following are the factor that governs the decision for a private company:

1. Nature of business

The nature of business is an important factor that directly impacts the type of business you choose to serve, like trading businesses, hotels, restaurants, etc.

2. scale of operations

The second important factor of a private limited company is to operate at either small, medium, or large. It all depends on whether you have available resources.

3. Levels of control in management

A private limited company is not a suitable option for a person who desires to control the whole business by himself. They can go for a private limited company if they can share an equal say in decision-making.

4. Degree of risk & liability

The level of risk and liability directly depends on the scale of operations. A private limited company operates at a small level and has less chance and harm than medium and large private limited companies.

5. Distribution of profit

If a person wants to receive all the profits of his business and bear all the risk, then sole proprietor is the best option. But, if you can share profit and loss, only go towards a private limited company.

6. Tax implication

Tax implication is very important in selecting a level to operate a private limited company. 

7. Transferability of ownership

If a person wants to keep the ownership private from others, then they should go for proprietorship. But, if you can share a request, go for a private limited company.

8. Independence

The private limited company is subject to government regulations. So if the entrepreneur wants freedom in business with little government interference, Then they must go with proprietorship.

Documents needed for incorporation of a private limited company

Their are various documents needed for incorporation of a private limited company. They are explained below:

1. Proof of identification

Following are the documents you can submit any one out of them as proof of identity:

1. Pan card
2. Aadhar card
3. Driving license
4. Passport 

2. Proof of address

 Following are the documents you can submit any one out of them as proof of address:

1. Latest telephone bill(not older than 60 days)
2. Latest electricity bill (not older than 60 days)
3. Bank account statement having an address 

3. Documents of the private limited Company /Proof of registered office of the company

The documents given below must be submitted as address proof of the company. They are as follows:

• Tenancy/rental agreement 
• Letter or NOC from the landlord, as use his/her property as the registered office. 
• Sale deed of the private limited company office premises in the name of the private limited company
• The Memorandum of Association (MoA) 
• The Articles of the Association (AoA) 

Steps to the registration of a private limited company

Their are the steps to registration of a private limited company. They are explained below:

1. Digital Signature Certificate (DSC)

A Digital Signature Certificate (DSC) is an essential document. In private limited company incorporation, DSCs are important for directors’ authentication. This ensures online document filing’s legality and authenticity. 

2. Director Identification Number (DIN)

The Director Identification Number (DIN) is a special ID card for people who want to become directors of private limited companies in India. It’s an important step to starting a new company. The DIN helps to ensure that only suitable and qualified individuals become directors, which is good for transparency and proper management. Once they get their DIN, they can use it to be directors in different companies for a lifetime.

3. Registering on the MCA Portal

 Registering on the MCA Portal is an important step when starting your company in India. It’s like creating an account on a special website that helps you with all the paperwork and steps for setting up your business. Registering on the portal allows you to submit your documents online, keep track of your application’s progress, and easily communicate with the government authorities. It makes the whole process smoother and more convenient, helping you get your private limited company up and running quickly and easily.

4. Certificate of Incorporation (CIN)

The Certificate of Incorporation (CIN) is the “birth certificate” of your newly established private limited company. It is the final and crucial step in starting your business. Your business is ready to take off after completing all requirements and obtaining government approval. This official document validates that your company is now legally registered and recognized. It includes your company’s name, registration number, and incorporation date.