Private Limited Company

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Private Limited Company (Pvt Ltd)

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. The business entity gets recognized 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:
1. Restricts the right to transfer its shares.
2. Except in case of One Person Company, limits the number of its members to two hundred.
3. 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

How is Ownership in private limited company?
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 to 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. Owners of company (members/shareholders) can get profit of company in the form of Dividend as per shares held by them.

Advantages of Pvt Ltd Company
a) 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.
b) Minimum Share Capital
In the case of Private Limited Company, the minimum share capital requirement is Rs.1,00,000/-. The investment required in the case of Public Limited Company is more. A Public Company requires a minimum share capital of Rs.5,00,000. So for startups it becomes convenient to register a Private Limited Company with small capital.
e) Continued Existence
A company has perpetual succession, that is continued or uninterrupted existence until it is legally dissolved. A company, being a separate legal person, is unaffected by the death or other departure of any member but continues to be in existence irrespective of the changes in membership. Perpetual succession is one of the most important characteristics of a company.
f) Separate Legal Entity
An entity means something which has a real existence a thing with distinct existence. A company is a legal entity and a juristic person established under the Company's Act 2013. A juristic person is a person who is not a natural person or human being. Therefore a company form of organization has wide legal capacity and can own property and also incur debts. The members (Shareholders/Directors) of a company have no liability to the creditors of a company for such debts. Hence, a pvt ltd company is a legal entity separate from that of its members.
g) Limited Liability
Limited Liability means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company the liability of the members in respect of the company's debts is limited. In other words, the liability of the members of a company is limited only to the extent of the face value of shares taken up by them. Therefore, where a company is limited by shares, the liability of the members on a winding-up is limited to the amount unpaid on their shares.
h) Free & Easy transferability of shares
Shares of a company limited by shares are transferable by a shareholder to any other person. The transfer is easy as compared to the transfer of interest in business run as a proprietary concern or a partnership. Filing and signing a share transfer form and handing over the buyer of the shares along with share certificate can easily transfer shares.
i) Owning Property
A company being a juristic person, can acquire, own, enjoy and alienate, property in its own name. No shareholder can make any claim upon the property of the company so long as the company is a going concern. The shareholders are not the owners of the company's property. The company itself is the true owner.
j) Capacity to sue and be sued
To sue means to institute legal proceedings against or to bring a suit in a court of law. Just as one person can bring a legal action in his/her own name against another in that person's name, a company being an independent legal entity can sue and also be sued in its own name.
k) Dual Relationship
In the company form of organization it is possible for a company to make a valid and effective contract with any of tis members. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, creditor, director and also an employee of the company
l) Borrowing Capacity
A company enjoys better avenues for borrowing of funds. It can issue debentures secured as well as unsecured and can also accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to a company rather than partnership firms or proprietary concerns.

Who shall opt for Pvt Ltd Company?
Startups and businesses with higher growth aspiration popularly choose Private Company as suitable business structure. Businesses who want to raise capital for its expansion can also opt for Private Ltd Company where they can issue shares to investors to raise funds.

Legal Compliances:
The legal compliances in the case of a private limited company are lesser. Management and Decision Making are easy, smooth and quick since number of members are less. Every Private Limited Company normally has to do following compliances:
1) Annual Statutory audit from Chartered Accountant
2) Income Tax Return Filing
3) ROC Annual Filing

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.

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 product based and growth-oriented businesses.

Types of Private Company:
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.