Advantages and Disadvantages of Private Limited Company

An entrepreneur can choose from many types of business structures to establish the business. In India, one of the most preferred business structures is the private limited company. A business has many advantages when incorporated as a private limited company. Let’s look at the private limited company advantages and disadvantages.

What is a Private Limited Company?

A private limited company is a company held privately by a group of persons. The member’s liability is limited to the shares held by them in the company. However, the shares of the private limited company cannot be publicly traded.

A private limited company is a popular form of business structure in India. It can be registered with just two members and two directors. However, the maximum number of members is 200. It is the most recommended form of business structure for millions of small and medium businesses that are professionally managed or family-owned.

Section 2(68) of the Companies Act, 2013 defines a private limited company as follows:

• A company having a minimum paid-up share capital.
• It restricts the right to transfer shares through its Articles of Association (AOA).
• It limits the number of its members to 200.
• It prohibits the issuance of a public invitation for subscribing to its securities.

Minimum Requirement of a Private Limited Company

• Minimum of two members.
• Members cannot be artificial legal entities.
• Minimum of two directors.
• A minimum of one director should be an Indian citizen residing in India.
• Minimum authorised share capital of Rs.1 lakhs.
• Digital Signature Certificate (DSC) of the directors.

Registration Process of a Private Limited Company

The process of registration of a private limited company is entirely online. It should be registered by applying the SPICe+ form on the MCA portal. The e-MOA (Memorandum of Association) and e-AOA must be uploaded with the SPICe+ form. The subscribers and directors of the company must digitally sign the e-MOA and e-AOA. Thus, the directors need to obtain the DSC before applying for registration. 

The process of registration of a private limited company is as follows:

• Apply for company name reservation in Part-A of the SPICe+ form with two proposed names. The company name must adhere to the provisions of the Companies Act, 2013 for it to be approved by the Registrar of Companies (ROC).
• Fill Part-B of the SPICe+ form within 20 days of the name approval by the ROC. A company can apply for the following registrations by filling the Part-B of the SPICe+ form:
  • Company incorporation.
  • Application for Director Identification Number (DIN).
  • PAN and TAN application.
  • GSTIN application.
  • EPFO and ESIC registration.
  • Opening of a company bank account.
• After filling out Part-A and Part-B of the SPICe+ form, upload the required documents, pay the respective fees and submit the form.
• The ROC will examine the application and issue the Certificate of Incorporation.

Advantages of a Private Limited Company

No Minimum Paid-up Capital

After the amendment of the Companies Act, 2013, private limited companies do not require a minimum paid-up capital. It can be registered with a nominal amount of Rs.1,00,000 authorised share capital.

Separate Legal Entity

A private limited company has a legal entity separate from its members. A separate legal entity means the law identifies the company as an entity with its own assets and liabilities. It can sue and be sued in its own name, i.e. company name. There is a separation of management and ownership. Thus, the managers are responsible and answerable for the company’s loss.

Limited Liability of Members

The members of the private limited company have limited liability. It means that if the company faces a loss, the personal assets of the members will not be used to pay the company’s debts. The members are liable to pay the debts only to the extent of how much they own towards their shareholding, i.e. the unpaid share value.

Fund Raising

It is easier for a company to raise funds than a sole proprietorship or partnership firm. Angel investors and venture capitalists invest only in private limited companies or public limited companies.

Perpetual Existence

A private limited company has a perpetual succession, which means it has a continued or uninterrupted existence until it is legally dissolved. Since the company is a separate legal person, the death of the founders, directors or members does not affect its existence. It continues its business irrespective of the changes in membership.

Foreign Direct Investment (FDI)

In a private limited company, 100% Foreign Direct Investment (FDI) is allowed, which means any foreign person or entity can directly invest in the company. FDI will help the company grow across the nation and even globally.

Credibility

The financial statements and incorporation details of a private limited company are available on the MCA website. This improves the company’s credibility since it makes it easy for investors, financial institutions and clients to easily authenticate company details before associating with it.

Disadvantages of a Private Limited Company

Number of Members

The members of a private limited company are limited. It can only have a maximum of 200 members, while a public limited company can have unlimited members.

Restriction on Transfer of Shares

In a private limited company, the transfer of shares is not allowed under its AOA, and these shares cannot be listed on the stock exchanges.

Cannot Issue Prospectus

A private limited company cannot issue a prospectus inviting the public to subscribe to its shares. The shares of the company cannot be listed on the stock exchanges.

These are the advantages and disadvantages of a private limited company. An entrepreneur must consider the advantages and disadvantages before deciding to incorporate a private limited company.