Introduction
A Private Limited Company (Pvt Ltd) is a business entity privately owned by a small group of shareholders or members. Unlike public limited companies, the shares of a private limited company are not publicly traded on a stock exchange. The shares of a private limited company are, therefore, held privately, meaning ownership and control are restricted to a few or some individuals. This structure is preferred by small to medium-sized enterprises (SMEs) due to its flexibility, legal recognition, and ability to limit liability for its shareholders.
Types of Private Limited Companies
- Company Limited by Shares
In a private company limited by shares, shareholders' liability is restricted to the unpaid amount on their shares. This means that a shareholder’s liability is limited to the nominal value of the shares held, as specified in the Memorandum of Association (MOA).
- Shareholders cannot be compelled to contribute more than the unpaid amount of their shares, even in the event of insolvency or liquidation.
- This structure has financial security for the shareholders; it is the most common form of private limited companies.
- Company Limited by Guarantee
In this private limited company, the members' liability is limited to the amount they guarantee to contribute to the company’s assets in case of winding up.
- This structure is often used by non-profit organisations or companies with charitable purposes, where capital investment is not a primary concern.
- Members are liable only for the guaranteed amount and not for any additional debts or obligations of the company.
- Unlimited Companies
An unlimited company does not impose any limits on the liability of its shareholders.
- Shareholders may be required to cover the company’s debts and liabilities in case of liquidation.
- Despite unlimited liability, the company retains a separate legal identity, meaning creditors cannot directly sue individual members unless the company is wound up.
- This structure is rare due to the high risk it poses to shareholders.
Key Features of a Private Limited Company
- Separate Legal Entity: A private limited company is considered a separate legal entity from its shareholders, allowing it to own assets, incur liabilities, and enter contracts independently.
- Limited Liability: Shareholders' assets are protected, as their liability is limited to their investment in shares or the guarantee provided.
- Perpetual Succession: The company’s existence is not affected by the death or departure of any shareholder. Ownership can be transferred, ensuring continuity of business operations.
- Restrictions on Share Transfer: Shares in a private limited company cannot be freely transferred, maintaining control within a close group of shareholders.
- No Minimum Paid-Up Capital Requirement: Under the Companies Act 2013, there is no minimum capital requirement for setting up a private limited company in India.
Advantages of a Private Limited Company
- Limited Liability Protection
Shareholders enjoy limited liability, ensuring their personal assets are protected from business liabilities. - Separate Legal Identity
Since a private limited company is a separate legal entity, it can own property, borrow funds, and sue or be sued in its own name. - Ease of Raising Capital
Private limited companies can raise capital through private placements or by issuing shares to existing shareholders, making it easier to fund expansion. - Credibility and Trust
Private limited companies are legally registered entities, which enhances their credibility with customers, suppliers, and financial institutions. - Attracts Talent
Private Limited companies can offer employee stock options (ESOPs), which help attract and retain top talent.
Disadvantages of a Private Limited Company
- Compliance Cost
Private Limited Company is pretty regulated and complaint. It holds annual filings, audits, board meetings, among others. - Prohibition of share transfer
Inhibiting a share transfer offers protection to ownership while it also severely restricts exit from the organisation or selling any stake in a company. - Set up and Maintaining Cost
Cost of raising a private company and maintaining itself may be rather more than raising a sole-proprietor or a partnership.
Key Takeaways
- Government Eases Compliance Norms for MSMEs
In a recent move to promote small and medium-sized enterprises (SMEs), the government has relaxed several compliance norms for private limited companies falling under the MSME category. - Increase in Incorporation of Private Limited Companies
According to the Ministry of Corporate Affairs (MCA), there was a considerable increase in the incorporation of private limited companies in the last financial year. The reason for this increase was easy registration and government initiatives like Startup India. - Introduction of SPICe+ Portal
The MCA has launched the SPICe+ portal, which offers a single-window platform for incorporating private limited companies, GST registration, EPFO, ESIC, and professional tax registration.
