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Reviewed by Nov 11, 2021| Updated on
A private company is a company which is owned by non-governmental organisations or a relatively small number of shareholders or members of a company. Usually, a private company does not offer or trade its shares to the general public on the stock exchanges, but rather the private stock of the company is owned and traded.
The Companies Act, 2013 allows the incorporation for shareholders and members of various types of companies with varying levels of liability. In addition to choosing between the organisations (LLP, Private Limited Company, One Individual Company), the promoters can also select between the following three forms of Private Limited Company depending on the company requirements.
1. Company Limited by Shares In these companies, the members' liability is limited to the nominal share amount as mentioned in the Memorandum of Association. The shareholder cannot be held liable or asked to pay more than his/her share capital invested in the company.
2. Company Limited by Guarantee In a private limited company limited by guarantee, the members' liability is limited to the amount of liability each member undertakes in the Memorandum of Association. Consequently, members of a Private Limited Company Limited by Guarantee can not be held accountable for a sum greater than the amount of guarantee performed by the member in the Association Memorandum.
Furthermore, the shareholder's guarantee in a company Limited by Guarantee can be sought only in the case of the company winding-up. The guarantee of the members of a Company Limited by Guarantee can not be withdrawn when the company is a going concern.
3. Unlimited Companies Unlimited corporations are those types of businesses that have no restrictions on their members' liability. Each member's liability extends over the entire amount of the company's debts and liabilities. Hence, an unlimited company's creditors have the right, if wound up, to impose the company's debt and liabilities on shareholders.
Despite not giving limited liability protection to the shareholders, an unlimited company is still regarded as a separate legal entity. The members of an unlimited firm can not, therefore, be sued individually.